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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


ý


Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

for the quarter endedSeptember 30, 2002 March 31, 2003 or


o


Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period fromto.


Commission File Number       0-228440-22844

SYLVAN LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

SYLVAN LEARNING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Maryland

52-1492296

(State or other jurisdiction of
incorporation or organization)

52-1492296

(I.R.S. Employer
Identification No.)




1001 Fleet Street, Baltimore, Maryland

21202

(Address of principal executive offices)

21202

(Zip Code)

Registrant’s telephone number, including area code:  (410)843-8000

Registrant's telephone number, including area code:(410) 843-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý. No o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  ý. No  o

 

The registrant had 40,328,87840,976,115 shares of Common Stock outstanding as of November 5, 2002.May 12, 2003.





SYLVAN LEARNING SYSTEMS, INC.
INDEX

INDEX




Page No.

PART I. - FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

Consolidated Balance Sheets—September 30, 2002Sheets – March 31, 2003 and December 31, 2001

32002

Consolidated Statements of Operations—Operations - Three months ended September 30,March 31, 2003 and March 31, 2002 and September 30, 2001

5

Consolidated Statements of Operations—Nine months ended September 30, 2002 and September 30, 20016

Consolidated Statements of Cash Flows—NineFlows - Three months ended September 30,March 31, 2003 and March 31, 2002 and September 30, 2001

7

Notes to Consolidated Financial Statements—September 30, 2002

8Statements – March 31, 2003

Item 2.

Management's

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosure of Market Risk

36

Item 4.

Controls and Procedures

37


PART II.—OTHER INFORMATION



PART II. - OTHER INFORMATION

Item 6.

Exhibits and Reports on Form 8-K

38




SIGNATURE


39



SIGNATURE


CERTIFICATIONS



40

CERTIFICATIONS

2




SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar and share amounts in thousands, except per share data)

 
 September 30,
2002

 December 31,
2001

 
 
 (Unaudited)

  
 
Assets 
Current assets:       
 Cash and cash equivalents $104,985 $102,194 
 Available-for-sale securities  39,221  60,091 

Receivables:

 

 

 

 

 

 

 
 Accounts receivable  75,264  70,180 
 Costs and estimated earnings in excess of billings on uncompleted contracts  2,448  1,586 
 Notes receivable from tuition financing  4,160  7,545 
 Other notes receivable  21,345  15,810 
 Other receivables  2,891  3,725 
  
 
 
   106,108  98,846 
 Allowance for doubtful accounts  (12,512) (11,036)
  
 
 
   93,596  87,810 
 
Inventory

 

 

6,981

 

 

7,344

 
 Deferred income taxes  4,290  3,810 
 Prepaid expenses and other current assets  24,386  23,679 
  
 
 
Total current assets  273,459  284,928 

Notes receivable from tuition financing, less current portion

 

 

4,762

 

 

8,636

 
Other notes receivable, less current portion  9,430  9,101 

Property and equipment:

 

 

 

 

 

 

 
 Land  27,002  14,552 
 Buildings  147,486  88,190 
 Construction-in-progress  18,861  8,897 
 Furniture, computer equipment and software  130,501  115,140 
 Leasehold improvements  38,894  34,876 
  
 
 
   362,744  261,655 
 Accumulated depreciation  (76,140) (60,147)
  
 
 
   286,604  201,508 
Intangible assets:       
 Goodwill  281,197  285,784 
 Other intangible assets, net of accumulated amortization of $2,499 and $1,507, at September 30, 2002 and December 31, 2001, respectively  5,717  6,893 
  
 
 
   286,914  292,677 

Investments in and advances to affiliates

 

 

7,994

 

 

40,387

 
Other investments  22,343  32,567 
Deferred income taxes  22,920  13,823 
Deferred costs, net of accumulated amortization of $4,690 and $3,322 at September 30, 2002 and December 31, 2001, respectively  7,411  7,943 
Other assets  24,695  17,621 
  
 
 
Total assets $946,532 $909,191 
  
 
 

See accompanying notes to consolidated financial statements.

 

 

March 31,
2003

 

December 31,
2002

 

 

 

(Unaudited)

 

(Restated)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

91,860

 

$

98,618

 

Available-for-sale securities

 

23,726

 

22,546

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

Accounts receivable

 

80,595

 

68,439

 

Notes receivable

 

14,315

 

11,270

 

Other receivables

 

6,274

 

7,566

 

 

 

101,184

 

87,275

 

Allowance for doubtful accounts

 

(13,486

)

(9,620

)

 

 

87,698

 

77,655

 

 

 

 

 

 

 

Inventory

 

4,702

 

3,955

 

Deferred income taxes

 

7,354

 

2,545

 

Prepaid expenses and other current assets

 

22,486

 

21,817

 

Current assets of discontinued operations

 

92,260

 

104,464

 

Total current assets

 

330,086

 

331,600

 

 

 

 

 

 

 

Notes receivable, less current portion

 

14,898

 

11,889

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land

 

39,805

 

38,028

 

Buildings

 

162,314

 

157,834

 

Construction-in-progress

 

16,872

 

14,496

 

Furniture, computer equipment and software

 

96,750

 

93,748

 

Leasehold improvements

 

29,991

 

28,747

 

 

 

345,732

 

332,853

 

Accumulated depreciation

 

(56,041

)

(50,623

)

 

 

289,691

 

282,230

 

Intangible assets:

 

 

 

 

 

Goodwill

 

194,526

 

193,301

 

Other intangible assets, net of accumulated amortization of $2,893 and $2,530 at March 31, 2003 and December 31, 2002, respectively

 

36,157

 

36,543

 

 

 

230,683

 

229,844

 

 

 

 

 

 

 

Investments in and advances to affiliates

 

927

 

8,730

 

Other investments

 

4,778

 

12,375

 

Deferred income taxes

 

12,919

 

10,231

 

Deferred costs, net of accumulated amortization of $4,882 and $4,417 at March 31, 2003 and December 31, 2002, respectively

 

8,808

 

6,600

 

Other assets

 

19,703

 

16,875

 

Long-term assets of discontinued operations

 

55,000

 

55,000

 

Total assets

 

$

967,493

 

$

965,374

 

3




SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Continued)
(continued)

(Dollar and share amounts in thousands, except per share data)

 
 September 30,
2002

 December 31,
2001

 
 
 (Unaudited)

  
 
Liabilities and stockholders' equity 
Current liabilities:       
 Accounts payable $27,298 $15,696 
 Accrued expenses  60,922  49,386 
 Income taxes payable  21,776  29,754 
 Current portion of long-term debt  17,061  6,449 
 Due to shareholders of acquired companies  20,354  3,657 
 Deferred revenue  73,530  54,578 
 Other current liabilities  1,030  8,154 
  
 
 
Total current liabilities  221,971  167,674 

Long-term debt, less current portion

 

 

144,643

 

 

124,474

 
Deferred income taxes  7,937   
Other long-term liabilities  18,595  14,207 
  
 
 
Total liabilities  393,146  306,355 

Minority interest

 

 

68,947

 

 

56,981

 

Stockholders' equity:

 

 

 

 

 

 

 
 Preferred stock, par value $0.01 per share—authorized 10,000 shares, no shares issued and outstanding as of September 30, 2002 and December 31, 2001     
 Common stock, par value $0.01 per share—authorized 90,000 shares, issued and outstanding shares of 40,332 as of September 30, 2002 and 38,742 as of December 31, 2001  402  387 
 Additional paid-in capital  257,829  229,386 
 Retained earnings  252,962  342,786 
 Accumulated other comprehensive loss  (26,754) (26,704)
  
 
 
Total stockholders' equity  484,439  545,855 
  
 
 
Total liabilities and stockholders' equity $946,532 $909,191 
  
 
 

 

 

March 31,
2003

 

December 31,
2002

 

 

 

(Unaudited)

 

(Restated)

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

26,016

 

$

28,171

 

Accrued expenses

 

57,664

 

55,315

 

Income taxes payable

 

1,130

 

12,680

 

Current portion of long-term debt

 

12,099

 

11,194

 

Due to shareholders of acquired companies

 

8,859

 

8,802

 

Deferred revenue

 

92,343

 

76,773

 

Other current liabilities

 

4,071

 

1,672

 

Current liabilities of discontinued operations

 

36,370

 

30,648

 

Total current liabilities

 

238,552

 

225,255

 

 

 

 

 

 

 

Long-term debt, less current portion

 

151,915

 

153,542

 

Other long-term liabilities

 

26,546

 

26,636

 

Total liabilities

 

417,013

 

405,433

 

 

 

 

 

 

 

Minority interest

 

73,616

 

74,013

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $0.01 per share—authorized 10,000 shares, no shares issued and outstanding as of March 31, 2003 and December 31, 2002

 

 

 

Common stock, par value $0.01 per share—authorized 90,000 shares, issued and outstanding shares of  40,958 as of March 31, 2003 and 40,331 as of December 31, 2002

 

410

 

403

 

Additional paid-in capital

 

263,818

 

257,926

 

Retained earnings

 

230,872

 

246,843

 

Accumulated other comprehensive loss

 

(18,236

)

(19,244

)

Total stockholders’ equity

 

476,864

 

485,928

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

967,493

 

$

965,374

 

See accompanying notes to consolidated financial statements.

4




SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollar and share amounts in thousands, except per share data)

 
 

Three months ended September 30,

 
 
 2002
 2001
 
 
 (Unaudited)

 
Revenues       
 Core operating segments $124,515 $104,918 
 Sylvan Ventures  6,948  141 
  
 
 
Total revenues  131,463  105,059 
  
 
 
Costs and expenses       
Direct costs:       
 Core operating segments  108,223  92,901 
 Sylvan Ventures  12,823  3,287 
General and administrative expenses:       
 Core operating segments  5,207  5,643 
 Sylvan Ventures  1,344  1,633 
Loss on assets sold  3,000   
  
 
 
Total costs and expenses  130,597  103,464 
  
 
 

Operating income

 

 

866

 

 

1,595

 

Other income (expense)

 

 

 

 

 

 

 
Investment and other income  1,543  2,441 
Interest expense  (2,067) (2,402)
Sylvan Ventures investment income  172  22,842 
Loss on investment  (7,359)  

Equity in net loss of affiliates:

 

 

 

 

 

 

 
 Sylvan Ventures  (965) (10,830)
 Other  72   
  
 
 
   (893) (10,830)
Minority interest in consolidated subsidiaries:       
 Sylvan Ventures  975  (20)
 Other  (762) (1,021)
  
 
 
   213  (1,041)
  
 
 
Income (loss) before income taxes  (7,525) 12,605 
Income tax benefit (expense)  1,834  (4,236)
  
 
 
Net income (loss) $(5,691)$8,369 
  
 
 

Earnings (loss) per common share:

 

 

 

 

 

 

 
 Basic $(0.14)$0.22 
 Diluted $(0.14)$0.20 

 

 

Three months ended March 31,

 

 

 

2003

 

2002

 

 

 

 

 

(Restated)

 

 

 

(Unaudited)

 

Revenues

 

 

 

 

 

Core operating segments

 

$

108,286

 

$

84,880

 

Sylvan Ventures

 

435

 

 

Total revenues

 

108,721

 

84,880

 

Costs and expenses

 

 

 

 

 

Direct costs:

 

 

 

 

 

Core operating segments

 

102,347

 

79,684

 

Sylvan Ventures

 

1,469

 

 

General and administrative expenses:

 

 

 

 

 

Core operating segments

 

5,794

 

5,109

 

Sylvan Ventures

 

977

 

1,305

 

Total costs and expenses

 

110,587

 

86,098

 

 

 

 

 

 

 

Operating loss

 

(1,866

)

(1,218

)

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Investment and other income

 

206

 

1,514

 

Interest expense

 

(2,402

)

(2,049

)

Loss on Sylvan Ventures investments held for sale

 

(8,394

)

 

 

 

 

 

 

 

Equity in net income (loss) of affiliates:

 

 

 

 

 

Sylvan Ventures

 

(7,502

)

(1,810

)

Other

 

66

 

(97

)

 

 

(7,436

)

(1,907

)

Minority interest in consolidated subsidiaries:

 

 

 

 

 

Sylvan Ventures

 

487

 

396

 

Other

 

(1,749

)

(1,343

)

 

 

(1,262

)

(947

)

Loss from continuing operations before income taxes and cumulative effect of change in accounting principle

 

(21,154

)

(4,607

)

Income tax benefit

 

8,012

 

2,691

 

Loss from continuing operations before cumulative effect of change in accounting principle

 

(13,142

)

(1,916

)

Income  from discontinued operations, net of income tax expense of  $1,655 in 2003 and $3,286 in 2002

 

2,388

 

1,500

 

Loss on disposal of discontinued operations, net of income tax benefit of $7,425 in 2003

 

(5,217

)

 

Loss before cumulative effect of change in accounting principle

 

(15,971

)

(416

)

Cumulative effect of change in accounting principle, net of income tax benefit of $7,700 in 2002

 

 

(78,634

)

Net loss

 

$

(15,971

)

$

(79,050

)

 

 

 

 

 

 

Loss per common share, basic and diluted:

 

 

 

 

 

Loss from continuing operations before cumulative effect of change in accounting principle

 

$

(0.33

)

$

(0.05

)

Net loss

 

$

(0.39

)

$

(2.01

)

See accompanying notes to consolidated financial statements.

5




SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(Dollar and share amounts in thousands, except per share data)

 
 

Nine months ended September 30,

 
 
 2002
 2001
 
 
 (Unaudited)

 
Revenues       
 Core operating segments $412,863 $347,383 
 Sylvan Ventures  16,390  204 
  
 
 
Total revenues  429,253  347,587 
  
 
 
Costs and expenses       
Direct costs:       
 Core operating segments  353,480  299,256 
 Sylvan Ventures  33,762  10,446 
General and administrative expenses:       
 Core operating segments  16,028  17,530 
 Sylvan Ventures  3,614  6,955 
Loss on assets sold  20,244   
  
 
 
Total costs and expenses  427,128  334,187 
  
 
 
Operating income  2,125  13,400 

Other income (expense)

 

 

 

 

 

 

 
Investment and other income  3,843  7,586 
Interest expense  (6,446) (6,873)
Sylvan Ventures investment income  445  22,204 
Loss on investment  (7,359) (14,231)

Equity in net loss of affiliates:

 

 

 

 

 

 

 
 Sylvan Ventures  (4,631) (46,204)
 Other  35  (263)
  
 
 
   (4,596) (46,467)

Minority interest in consolidated subsidiaries:

 

 

 

 

 

 

 
 Sylvan Ventures  2,203  3,076 
 Other  (4,228) (5,041)
  
 
 
   (2,025) (1,965)
  
 
 
Loss before income taxes and cumulative effect of change in accounting principle  (14,013) (26,346)
Income tax benefit  2,823  9,696 
  
 
 
Loss before cumulative effect of change in accounting principle  (11,190) (16,650)
Cumulative effect of change in accounting principle, net of income tax benefit of $7,700  (78,634)  
  
 
 
Net loss $(89,824)$(16,650)
  
 
 
Loss per common share, basic and diluted:       
 Loss before cumulative effect of change in accounting principle $(0.28)$(0.44)
 Net loss $(2.25)$(0.44)

See accompanying notes to consolidated financial statements

6



SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

(Amounts in thousands)

 
 Nine months ended September 30,

 
 
 2002
 2001
 
 
 (Unaudited)

 
Operating activities       
Net loss $(89,824)$(16,650)
 Adjustments to reconcile net loss to net cash provided by (used in) operating activities:       
   Cumulative pre-tax effect of change in accounting principle  86,334   
   Depreciation  20,500  17,087 
   Amortization  1,307  11,190 
   Loss on assets sold  20,244   
   Deferred income taxes  2,009  (162)
   Loss (gain) on investments  6,914  (7,973)
   Equity in net loss of affiliates  4,596  46,467 
   Minority interest in income of consolidated subsidiaries  2,025  1,965 
   Other non-cash items  44  1,104 
   Changes in operating assets and liabilities:       
    Receivables  (10,434) 3,891 
    Tuition loans, net  5,536  (4,496)
    Inventory, prepaid expenses and other current assets  (1,852) 710 
    Payables and accrued expenses  12,384  (4,804)
    Income taxes payable  (11,552) (112,993)
    Deferred revenue and other current liabilities  5,186  (11,966)
  
 
 
Net cash provided by (used in) operating activities  53,417  (76,630)
  
 
 
Investing activities       
Purchase of available-for-sale securities  (17,592) (108,045)
Proceeds from sale or maturity of available-for-sale securities  38,674  251,118 
Cash paid for investments in and advances to affiliates  (2,989) (38,228)
Proceeds from sale of investments in affiliates  8,000   
Purchase of property and equipment  (46,835) (40,356)
Cash paid for acquired businesses, net of cash received  (37,666) (11,285)
Payment of contingent consideration for prior period acquisitions  (775) (39,491)
Expenditures for deferred contract costs  (2,508) (2,936)
Increase in other assets  (2,067) (1,859)
  
 
 
Net cash provided by (used in) investing activities  (63,758) 8,918 
  
 
 
Financing activities       
Proceeds from exercise of options  14,694  15,010 
Proceeds from issuance of debt  19,486  23,212 
Payments on debt  (16,648) (19,118)
Cash received from minority members of Sylvan Ventures  11,552  23,272 
Cash distributed to minority members of Sylvan Ventures  (12,000)  
Increase (decrease) in other long-term liabilities and other financing activities  (1,359) 736 
  
 
 
Net cash provided by financing activities  15,725  43,112 
  
 
 

Effect of exchange rate changes on cash

 

 

(2,593

)

 

(1,453

)
  
 
 

Net increase (decrease) in cash and cash equivalents

 

 

2,791

 

 

(26,053

)
Cash and cash equivalents at beginning of period  102,194  116,490 
  
 
 
Cash and cash equivalents at end of period $104,985 $90,437 
  
 
 

 

 

Three months ended March 31,

 

 

 

2003

 

2002

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net loss

 

$

(15,971

)

$

(79,050

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

8,382

 

6,380

 

Amortization

 

711

 

426

 

Deferred income taxes

 

(2,422

)

(344

)

Loss on investments  held for sale

 

8,394

 

 

Equity in net loss of affiliates

 

7,436

 

1,907

 

Minority interest in income of consolidated subsidiaries

 

1,262

 

947

 

Loss on disposal of discontinued operations

 

5,217

 

 

Cumulative effect of change in accounting principle

 

 

86,334

 

Other non-cash items

 

1,586

 

(246

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

(18,652

)

(14,829

)

Tuition loans, net

 

881

 

2,555

 

Inventory, prepaid expenses and other current assets

 

(3,002

)

(5,625

)

Accounts payables and accrued expenses

 

4,525

 

6,455

 

Income taxes payable

 

(4,189

)

(8,995

)

Deferred revenue and other current liabilities

 

17,029

 

17,514

 

Net cash provided by operating activities

 

11,187

 

13,429

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchase of available-for-sale securities

 

(9,519

)

(1,912

)

Proceeds from sale or maturity of available-for-sale securities

 

8,287

 

13,950

 

Investment in and advances to affiliates and other investments

 

(331

)

(831

)

Purchase of property and equipment

 

(9,414

)

(13,487

)

Cash paid for acquired businesses, net of cash received

 

 

(10,207

)

Payment of contingent consideration for prior period acquisitions

 

(1,714

)

 

Expenditures for deferred contract costs

 

(1,158

)

(890

)

Increase in other assets

 

(3,374

)

(4,336

)

Net cash  used in investing activities

 

(17,223

)

(17,713

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from exercise of options and warrants

 

90

 

8,628

 

Proceeds from issuance of debt

 

564

 

12,991

 

Payments on debt

 

(2,626

)

(1,280

)

Cash received from minority members of Sylvan Ventures

 

829

 

7,588

 

Cash distributed to minority members of  Sylvan Ventures

 

 

(12,000

)

Change in other long-term liabilities

 

(58

)

713

 

Net cash provided by (used in) financing activities

 

(1,201

)

16,640

 

Effect of exchange rate changes on cash

 

234

 

(234

)

Net increase (decrease) in cash and cash equivalents

 

(7,003

)

12,122

 

Cash and cash equivalents at beginning of period

 

106,043

 

102,194

 

Cash and cash equivalents at end of period

 

$

99,040

 

$

114,316

 

 

 

 

 

 

 

Cash and cash equivalents classified as:

 

 

 

 

 

Continuing operations

 

91,860

 

107,163

 

Discontinued operations

 

7,180

 

7,153

 

Cash and cash equivalents at end of period

 

$

99,040

 

$

114,316

 

See accompanying notes to consolidated financial statements.

7

6




Sylvan Learning Systems, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Unaudited

(Dollar and share amounts in thousands, except per share amounts)

September 30, 2002March 31, 2003

Note 1—1 - Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month and nine month periodsperiod ended September 30, 2002March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.2003.  The traditional semester programs in the education industry, with a summer break, result in large seasonality in the operating results of Sylvan Learning Systems, Inc. (the "Company"“Company”).  The consolidated balance sheet at December 31, 20012002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2001.2002.

 Core operating

On March 10, 2003 the Company announced that it would sell the operations comprising its K-12 education business units (“K-12 segment”) and committed to a plan to sell certain investments in Sylvan Ventures that are not strategic to its remaining post-secondary education business (see Note 4 for further description).  In connection with this announcement, the Company realigned its business segments.  The Company’s realigned segments include three separate business segments: a campus based university segment (“Campus Based”), an online university segment (“Online”), and Sylvan Ventures.  The Campus Based segment owns or maintains controlling interests in six private universities located in Spain, Switzerland, Mexico, Chile and France and also includes the operating resultsnon-Spain operations of Wall Street Institute, a European-based franchiser and operator of learning centers that teach the English language in the post-secondary market.  The Online segment provides professional development and graduate degree programs to teachers through Canter and Associates. Online also includes the operations of Walden E-Learning, Inc. (“Walden”) and National Technological University (“NTU”), which were previously reported as part of Sylvan Ventures. The Sylvan Ventures segment includes investments in certain education technology companies and consolidates the operations of EdVerify, Inc. (“EdVerify”) and Educational Satellite Services, Inc. (“ESS”), majority-owned subsidiaries.  The Company plans to dispose of all remaining investments of the following business segments: K-12 Education Services, Online Higher Education, International Universities and English Language Instruction-Spain. Sylvan Ventures revenuessegment, including EdVerify and direct costs include the operating results of its consolidated investments (refer to Note 6 for further information).ESS. Sylvan Ventures general and administrative expenses include the costs incurred to oversee its investments,investments.

The accompanying consolidated balance sheets, statements of operations and related notes have been restated to build its investment portfolio and costs included inreflect the start-up phase of consolidated businesses prior to the generation of operating revenues.K-12 segment as discontinued operations for all periods presented.

 

Certain amounts previously reported for 20012002 have been reclassified to conform with the 20022003 presentation.

Note 2—2 – Accounting Policies

Stock Options Granted to Employees and Non-Employees

The Company records compensation expense for all stock-based compensation plans using the intrinsic value method and provides pro forma disclosures of net income (loss) and net earnings (loss) per common share as if the fair value method had been applied in measuring compensation expense.  The Company records compensation expense for all stock options granted to non-employees in an amount equal to their estimated fair value at the earlier of the performance commitment date or the date at which performance is complete, determined using the Black-Scholes option valuation model.  The compensation expense is recognized ratably over the vesting period.

7



Pro forma net income and earnings per share information has been determined as if the Company had accounted for its stock options using the fair value method.  The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods.  The Company’s pro forma information is as follows for the quarters ended March 31:

 

 

2003

 

2002

 

Net loss, as reported

 

$

(15,971

)

$

(79,050

)

Stock-based employee compensation expense included in net income as reported, net of tax

 

25

 

30

 

Stock-based employee compensation expense as if the fair value method had been applied, net of tax

 

(98

)

(655

)

Pro forma net loss

 

$

(16,044

)

$

(79,675

)

 

 

 

 

 

 

Loss per share, basic and diluted:

 

 

 

 

 

As reported

 

$

(0.39

)

$

(2.01

)

Pro forma

 

$

(0.40

)

$

(2.02

)

Note 3 - New Accounting Standards

In June 2001,2002, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142,146, Accounting for Costs Associated with Exit or Disposal ActivitiesGoodwill and Other Intangible Assets,, which establishedaddresses the financial accounting and reporting standards for acquired goodwill and other intangible assets. Undercertain costs associated with exit or disposal activities.  Statement No. 142, goodwill and indefinite-lived intangible assets146 requires that these costs be recorded at their fair value when a liability has been incurred.  Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred.  The provisions of Statement No. 146 are no longer amortized buteffective for exit or disposal activities that are subject to annual impairment tests in accordance with the new standard. Other intangible assets that have finite lives will continue to be amortized over their useful lives.initiated after December 31, 2002.  The Company adopted Statement No. 142 effective January 1, 2002. Refer to Note 5 for further information.

        In August 2001, the Financial Accounting Standards Board issued Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 supersedes Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provides a single accounting model for long-lived assets to be held and used or to be disposed of. The Company adopted Statement No. 144 effective January 1, 2002 anddoes not expect the adoption of the new standard did notto have a material impact on the Company'sits consolidated financial position or results of operations.

8



Note 3—Loss on Assets Sold

In JuneNovember 2002, the Company adopted a plan to sell the portionFASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of its English Language Instruction segment that is located in Spain ("WSI Spain"). As a result of the pending sale and an estimate of the likely sale proceeds, the Company recognized an impairment charge of $17,244 in June 2002 related to WSI Spain. In the third quarter of 2002, the Company completed the sale of WSI Spain and as a result recognized an additional loss of $3,000. These losses are included in loss on assets sold in the consolidated statements of operations.

Others. The remaining English Language Instruction businesses are now included in the International Universities segment to reflect the combination of business management and the interrelationship of the Wall Street Institute operations and the university programs.

Note 4—Acquisitions

        Effective January 1, 2002, the Company acquired substantially all of the net operating assets of three Sylvan Learning Center franchise businesses, comprising 30 centers, for an initial cash payment of $11,000 and 144 shares of Sylvan common stock with a quoted market value of $3,000. The purchase agreement required the Company to pay additional consideration to the sellers in the event that specified levels of operating results were achieved in 2002, 2003, 2004 and 2005. As of September 30, 2002, the Company recorded $6,900 as a liability in final settlement of all remaining contingent payments. This amount was paid in October 2002. The purchase price totaled approximately $21,010, including acquisition costs of $110. The purchase price was allocated to acquired assets totaling $22,999 and assumed liabilities of $1,989. The preliminary allocation of the purchase price is subject to revision basedInterpretation elaborates on the final determination of the fair value of certain acquired intangible assets. The final purchase price may differ from this preliminary amount duedisclosures to adjustment to acquisition related costs. The results of operations of the acquired franchises are includedbe made by a guarantor in the accompanyingits interim and annual financial statements commencing on January 1, 2002.

        In connection with the settlement of the contingent purchase price of these Learning Center franchises, the Company entered into an agreement with the sellers, effective August 31, 2002, to repurchase the franchise rights in the United Kingdom and France for cash of $9,179.about its obligations under certain guarantees that it has issued.  The amount was paid in October 2002. The initial purchase price was allocated to acquired assets totaling $9,369 and assumed liabilities of $190. The preliminary allocation of the purchase price is subject to revision based on the final determination of the fair value of certain acquired intangible assets. The final purchase price may differ from this preliminary amount due to adjustment to acquisition related costs.

        On February 1, 2002, Sylvan Ventures exercised its option to acquire an additional 10% ownership of common stock in Walden E-Learning, Inc. ("Walden") for $8,000, increasing its ownership percentage in Walden to 51%. Prior to the exercise of its option, Sylvan Ventures had acquiredInterpretation also clarifies that a 41% stake in Walden for $32,800 in February 2001. The transactions have been accounted for as a step acquisition with a total purchase price of $39,892, after subtracting previously recorded equity in net losses. The purchase price was allocated to acquired assets totaling $45,451 and assumed liabilities of $5,559. The preliminary allocation of the purchase price is subject to revision based on the final determination of the fair value of certain acquired intangible assets. The final purchase price may differ from this preliminary amount due to adjustment to acquisition related costs. The results of operations of Walden are consolidated in the accompanying financial statements commencing on February 1, 2002.

9



        On March 1, 2002, the Company acquired for cash all of the outstanding common stock of Hedleton Holding, N.V., which owns all of the capital stock of Escuela Superior De Alta Gestion De Hotel, S.A. ("Marbella"), a private for-profit university located in Marbella, Spain. Marbella was previously a franchise of Swiss Hotel Association Hotel Management School Les Roches ("Les Roches"), which was acquired by the Company in 2000. The purchase price for the outstanding common stock totaled approximately $6,987, including acquisition costs of $552. The purchase price was allocated to acquired assets totaling $9,572 and assumed liabilities of $2,585. The preliminary allocation of the purchase price is subject to revision based on the final determination of the fair value of certain acquired intangible assets. The final purchase price may differ from this preliminary amount due to adjustment to acquisition related costs. The results of operations of Marbella are included in the accompanying financial statements commencing on March 1, 2002.

        Effective May 1, 2002, the Company acquired an additional 20% ownership interest in Desarrollo del Conocimiento S.A. ("Decon"), a consolidated holding company that controls and operates the Universidad de Las Americas ("UDLA"), for cash of approximately $6,500, increasing its total ownership in Decon to 80%. The purchase price of the additional interest was accounted for as a step acquisition and was allocated to acquired assets of $6,500. The preliminary allocation of this additional purchase price is subject to revision based on the final determination of the fair value of certain acquired intangible assets.

        Effective August 1, 2002, the Company acquired for cash all of the outstanding common stock of the Glion Group, S.A., the parent company of Glion Hotel School, S.A. ("Glion"), a leading hotel management school in Switzerland. The initial purchase price totaled approximately $11,671, including acquisition costs of $900. Additionally, the Companyguarantor is required to make payments of $2,020 and $3,392 on August 30, 2003 and August 30, 2004, respectively. The purchase agreement includes a provision for a possible reduction in the purchase price of up to $1,482, based on the working capital of Glionrecognize, at the acquisition date. The Company believes that it is probable this contingency will be resolved in its favor and, therefore, has recorded the purchase price netinception of this contingency. The initial purchase price was allocated to acquired assets totaling $58,118 and assumed liabilities of $42,517. The preliminary allocation of the purchase price is subject to revision based on the final determination of the fair value of certain acquired intangible assets. The final purchase price may differ from this preliminary amount due to adjustment to acquisition related costs. The results of operations of Glion are included in the accompanying financial statements commencing on August 1, 2002.

Note 5—Goodwill and Other Intangible Assets

        Statement No. 142 requires that goodwill be testeda guarantee, a liability for impairment at the reporting unit level at the time of its adoption and at least annually thereafter, utilizing a two-step methodology. The initial step required the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. When the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of Interpretation No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The disclosure requirements in Interpretation No. 45 are effective for financial statements of interim or annual periods ending after December 15, 2002.  The Company has made certain guarantees that may be subject to the liability recognition provisions of the Interpretation if modified.  The Company adopted the disclosure requirements of the standard for its December 31, 2002 reporting unit exceededperiod.

In January 2003, the carrying value, no impairmentFASB issued Interpretation No. 46, Consolidation of Variable Interest Entities.  The objective of Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities.  The Interpretation requires variable interest entities to be consolidated by a company if that company is subject to a majority of the risk of loss was recognized.from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both.  The second step requiredCompany currently does not have any variable interest entities and, therefore, will apply the provisions of Interpretation No. 46 prospectively.

8



The EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, addresses situations which may involve the delivery or performance of multiple products, services, and/or rights to use assets, and for which performance may occur at different points in time or over different periods of time.  The Issue also addresses whether the different revenue-generating activities, or deliverables, are sufficiently separable, and there exists sufficient evidence of their fair values to separately account for some or all of the deliverables.  The issue applies to all contractual arrangements under which a vendor will perform multiple revenue-generating activities.  Issue No. 00-21 is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted.  The Company will adopt this guidance prospectively for all revenue arrangements entered into after January 1, 2003.  The Company does not believe that the impact of adoption will be material to reported operating results.

Note 4 – Discontinued Operations

On March 10, 2003, the Company and Educate, Inc., a company newly formed by Apollo Management, L.P., (“Apollo”) executed an Asset Purchase Agreement that provided for the acquisition by Educate, Inc. of substantially all of the Company’s K-12 education business units, including eSylvan, Inc. and Connections Academy, Inc., which are investments held by Sylvan Ventures (“K-12 Disposal Group”). The consideration for the sale of the assets comprising the K-12 Disposal Group will consist of the following at closing:

                  Cash of $112,000 to determine$117,000 plus an amount equal to the implied fairdifference between $72,500 and the conversion value of goodwill. Whenthe convertible debentures issued by the Company and surrendered by Apollo at closing, less any accrued and unpaid interest on the debentures, plus deferred payments of approximately $3.0 million;

                  A subordinated note in the amount of $55,000, bearing interest at 12% per annum and maturing in 2009;

                  The surrender of convertible debentures issued by the Company with a conversion value of up to $72,500;

                  The assumption of trade accounts payable of the K-12 business units, and other specified liabilities of the K-12 business units;

                  Apollo’s 25% preferred interest in Sylvan Ventures.

Additionally, the proceeds received by the Company are subject to post-closing adjustments for specified changes in working capital from the date of the agreement to the closing date.  The Company is also eligible for up to $10 million of additional consideration if certain operations of Connections Academy exceed specified levels of earnings any time prior to December 31, 2007.  The transaction will result in the elimination of various consent and governance rights that had been held by Apollo.  Apollo’s representation on the Company’s Board of Directors will be reduced from two board seats to one.

As a result of this expected disposal transaction, the Company estimates that it will record a yet to be determined gain from the disposition of its K-12 business units upon closing of the sale to Educate, Inc.  (expected to be in the second quarter of 2003), representing the difference between the carrying value of the reporting unit goodwill exceedednet assets sold (approximately $111 million at March 31, 2003) and net proceeds upon sale.

In the implied fair valuefirst quarter of that goodwill, an impairment loss was recognized in an amount equal to that excess, not exceeding the carrying value of the goodwill. The fair values of reporting units

10



and the related implied fair values of their respective goodwill were determined using discounted cash flows.

        As a result of testing goodwill for impairment in accordance with Statement No. 142, as of January 1, 2002,2003, the Company recorded a non-cash chargeloss on disposal of $78,634,discontinued operations of $5,217, net of income tax benefit of $7,700, which is included as a cumulative effect of a change in accounting principle in the consolidated statements of operations. The impairment charge relates solely to the Wall Street Institute ("WSI") business and consists of the write-down of goodwill$7,425 related to the distressedwrite-off of the net assets of the UK/France Disposal Group.  The Company expects to sell these two operations in Spain ($22,551—included in the English Language Instruction—Spain segment) andfor principally contingent amounts originally paid for operations in other countries ($56,083—included in the Wall Street Institute business unit within the International Universities segment). Included in this cumulative effect of a change in accounting principle in the International Universities segment are charges of $2,491 which were identified in the third quarter of 2002 in connection with the reconciliation of intangibles related to the foreignfuture consideration by December 31, 2003.

The operations of the WSI business.

        In addition to requiring annual impairment tests, Statement No. 142 established that goodwill would no longerCompany’s disposal groups comprising its K-12 business units are classified as discontinued operations.  Because the operations and cash flows of these components will be amortized. Prior to January 1, 2002,eliminated from the ongoing operations of the Company amortized goodwill over periods ranging from 15 to 35 years. The followingas a result of the disposal transactions, and because the Company will not have any significant continuing involvement in the held for sale operations after the disposal transactions, the results of operations of this component will be reported for all periods as a separate component of income, net of income taxes.

Summarized operating results from the Company give effect todiscontinued operations included in the non-amortization provisionsCompany’s statement of Statement No. 142 assuming adoptionoperations are as of January 1, 2001:follows for the three months ended March 31:

 
 Three months ended
September 30, 2001

 Nine months ended
September 30, 2001

 
 
 Net
Income

 Earnings
Per Share

 Net Loss
 Loss Per
Share

 
As reported—Basic $8,369 $0.22 $(16,650)$(0.44)
Effect of goodwill amortization  3,255  0.08  10,242  0.27 
  
 
 
 
 
Adjusted $11,624 $0.30 $(6,408)$(0.17)
  
 
 
 
 
As reported—Diluted $9,194 $0.20 $(16,650)$(0.44)
Effect of goodwill amortization  3,255  0.07  10,242  0.27 
  
 
 
 
 
Adjusted $12,449 $0.27 $(6,408)$(0.17)
  
 
 
 
 

 The following table displays the intangible assets that continue to be subject to amortization

 

 

K-12

 

UK/France

 

 

 

2003

 

2002

 

2003

 

Revenues

 

$

60,850

 

$

52,972

 

$

204

 

Pretax income (loss) from discontinued operations

 

$

4,808

 

$

4,786

 

$

(766

)

9



Assets and goodwill not subject to amortization as of September 30, 2002:

 
 Amortizing
Intangible
Assets

 Goodwill
Gross carrying amount $8,216 $281,197
Accumulated amortization  (2,499) 
  
 
Net carrying amount $5,717 $281,197
  
 

        The estimated amortization expense for intangible assets for eachliabilities of the five years subsequent todiscontinued operations were as follows:

 

 

K-12 Disposal Group

 

UK/France Disposal Group

 

 

 

March 31,
2003

 

December 31,
2002

 

December 31,
2002

 

Current assets

 

$

39,578

 

$

41,109

 

$

795

 

Property and equipment, net

 

25,187

 

26,326

 

896

 

Goodwill

 

74,997

 

71,705

 

9,035

 

Other assets

 

6,746

 

9,485

 

113

 

Current liabilities

 

(34,938

)

(30,134

)

 

Long-term liabilities

 

(680

)

(514

)

 

Net assets of discontinued operations

 

$

110,890

 

$

117,977

 

$

10,839

 

The accompanying balance sheets at March 31, 2003 and December 31, 2001 is as follows: 2002—$1,867; 2003—$1,831; 2004—$1,575; 2005—$646; and 2006—$412.

11



Note 6—Investments

Consolidated Investments

        eSylvan, Inc. ("eSylvan") was formed to distribute the Company's learning center tutoring product to students at home via computer. During 2001, eSylvan issued common stock representing a minority ownership interest to franchisees of Sylvan Learning Centers to more fully leverage the relationship between center-based and online tutoring. Sylvan Ventures made two preferred stock purchases during 2002 for $9,400, which increased the Sylvan Ventures ownership share to 92%. The minority interest ownership of the franchisees represents 8% of the voting ownership interest at September 30, 2002.

        Walden is an online university offering Ph.D. and other graduate-level degree programs in education, management and the social and behavioral sciences. Effective February 1, 2002, Sylvan Ventures exercised its option to acquire an additional 10% of Walden, increasing its voting ownership to 51%. As a result, Sylvan Ventures changed its method of accounting for its investment in Walden from the equity method to the consolidation method.

        EdVerify, Inc. ("EdVerify") is a business to business digital service provider that specializes in verifying the higher education enrollment and degree attainment of job candidates and credit requestors. Effective June 1, 2002, Sylvan Ventures acquired an additional 35% ownership in EdVerify for $2,507, increasing its voting ownership to 68%. As a result, Sylvan Ventures changed it method of accounting for its investment in EdVerify from the equity method to the consolidation method.

        Connections Academy, Inc. ("Connections Academy") was formed by Sylvan Ventures to provide online charter schooling to the K-12 market. Connections Academy began providing virtual schooling to students in the fall of 2002. Sylvan Ventures owns 100% of Connections Academy.

        In November 2002, Sylvan Ventures completed its acquisition of substantially allclassifies the assets and certain liabilities of the National Technological University ("NTU")asset disposal groups based on the probable timing of sales proceeds.

Note 5 - Investments

Sylvan Ventures

On March 10, 2003 Sylvan acquired the remaining membership interests in Sylvan Ventures not owned by Sylvan or Apollo for consideration of 581 shares of Sylvan common stock, which is restricted from sale for three years. These membership interests were held by a group of investors, including certain executives of the Company.  Additionally, all membership profit interests in Sylvan Ventures were eliminated.  Upon completion of the sale of the K-12 business units, the Company will own all of the membership interests of Sylvan Ventures LLC.  Contemporaneous with these transactions, the Company announced its intention to disband Sylvan Ventures and Stratys Learning Solutions, Inc. (the holding companysell assets non-strategic to its post-secondary business, and recorded a loss on Sylvan Ventures assets held for sale of NTU)$8,394, primarily representing the book value of  Sylvan Ventures cost basis investments in iLearning ($298) and ClubMom ($7,596). In addition, Sylvan Ventures wrote down the balance in its equity method investment in Chancery through a charge to equity in net loss of affiliates.  Sylvan Ventures also recorded an operating loss of $221 related to the write-off of the net assets of the consolidated investment in EdVerify.  These investments are being marketed to a single buyer and are expected to be sold by June 30, 2003 for $7,315 in cashprincipally contingent consideration.

The remaining investments of Sylvan Ventures  consist of the consolidated investments of Walden and NTU, which will be managed and reported within the Online segment, and a promissory$2,371 note payable of $7,500 due in 2007. In connection withreceivable that will mature over the acquisition of NTU, there is contingent consideration payable to the sellers for a minimum of $2,000 and a maximum of $3,000 if NTU is sold or is involved in an initial public offering where the value of NTU exceeds $200,000. NTU is a leading distance learning university accredited by the North Central Association, offering master's degrees specializing in engineering, technology and management.

Investment in Affiliates (Equity Method Investments):next two years.

 The Company's investment in and advances to affiliates consist of investments in and loans to companies in the initial or early stages of development. These companies are frequently illiquid or experiencing cash flow deficits from operations. Further, investments are generally unsecured and subordinated to the claims of other creditors. Accordingly, the Company's investments in and advances to affiliates are subject to a high degree of investment and credit risk. The Company has made estimates of the recoverability of loans and advances to its affiliates, and due to the inherent uncertainty of the operations of these affiliates, it is possible that these estimates may change in the near term.

12



Investments in and advances to affiliates consist principally of investments in common stock and preferred stock, and convertible notes, as follows as of September 30, 2002March 31, 2003 and December 31, 2001,2002, respectively:

 
 September 30,
2002

 Ownership
Interest

 December 31,
2001

 Ownership
Interest

Walden E-Learning, Inc. $  $31,909 41%
Chancery Software Limited  6,090 42%  6,774 42%
iLearning, Inc.  1,242 40%  461 27%
EdVerify, Inc.     679 42%
Other  662   564 
  
   
  
Total $7,994   $40,387  
  
   
  

 At September 30, 2002, the difference between the carrying amount of equity method investments and the amount of underlying

 

 

March 31, 2003

 

Ownership
Interest

 

December 31,
2002

 

Ownership
Interest

 

 

 

 

 

 

 

 

 

 

 

Chancery Software Limited

 

$

 

42.0

%

$

6,964

 

42

%

iLearning, Inc.

 

 

2.5

%

641

 

40

%

Other

 

927

 

 

 

1,125

 

 

 

Total

 

$

927

 

 

 

$

8,730

 

 

 

Sylvan Ventures equity in net assets of these investments was $5,577. Under the provisions of Statement No. 142, the goodwillgains (losses) related to equity methodthe investments is no longer amortized beginning in January 2002. Prior to 2002, the goodwill was amortized primarily over a three-year period as a component of the Company's allocable share of income or loss. Foraffiliates for the three monthmonths ended March 31, 2003 and nine month periods ended September 30, 2001, equity in net loss2002 was $865 (excluding the write-down of affiliates included amortization of $2,128Chancery) and $7,106,$1,810, respectively.

 

10



Each period in the tables below includes summarized financial data of those affiliates accounted for using the equity method in which Sylvan Ventures had an interest at the end of the respective period, and includes results of operations data of the affiliatesaffiliate for the entire period.

 
 September 30,
2002

 December 31,
2001

Current assets $8,833 $23,176
Other assets  3,741  17,988
Current liabilities  11,076  19,916
Long-term and other liabilities  2,520  17,004
Redeemable convertible preferred stock  52,622  66,878
 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2002
 2001
 2002
 2001
 
Net sales $5,730 $12,607 $16,863 $39,252 
Gross profit  4,265  6,962  12,007  25,440 
Net loss  (1,808) (14,060) (9,935) (74,562)

Other Investments (Cost Method Investments):quarter.

 

 

 

March 31,
2003

 

December 31,
2002

 

 

 

 

 

 

 

Current assets

 

$

7,087

 

$

8,799

 

Other assets

 

1,236

 

3,280

 

Current liabilities

 

7,180

 

10,444

 

Long-term and other liabilities

 

3

 

2,478

 

Redeemable convertible preferred stock

 

 

38,520

 

 

37,368

 

 

 

Three months ended March 31,

 

 

 

2003

 

2002

 

Net sales

 

$

4,104

 

$

5,339

 

Gross profit

 

3,052

 

3,018

 

Net loss

 

 

(1,163

)

 

(4,868

)

Note 6 - Goodwill and Other investments consistIntangible Assets

The following table summarizes the intangible assets that are subject to amortization as of non-marketable investments in common and preferred stocks of private companies in which the Company does not exercise significant influence. These investments areMarch 31, 2003:

13



 

 

Amortizing
Intangible
Assets

 

Gross carrying amount

 

$

9,783

 

Accumulated amortization

 

(2,893

)

Net carrying amount

 

$

6,890

 

carried at cost unless a decline in

The estimated fair value is determined to be permanent. Other investments consistedamortization expense for intangible assets for each of the following:

 
 September 30,
2002

 December 31,
2001

Core Operating Segments:      
Chauncey Group International, Ltd. $ $8,000
Frontline Group, Inc.    7,000
Sylvan Learning Center Spain  9,741  5,241
Other  5,006  5,000
Sylvan Ventures Segment:      
ClubMom, Inc.  7,596  7,326
  
 
Total $22,343 $32,567
  
 

Realized Investment Income and Losses

        During the three month period ended September 30, 2002, the Company recorded a loss of $7,359 related to the write-off of its investment in and advances to the Frontline Group. This investment write-off was a result of challenges facing the corporate training industry in general, and Frontline Group specifically. The Company originally accepted shares of common stock in Frontline Group, in 1999, as consideration for the sale of the PACE business unit.

        During the three month period ending June 30, 2002, the Company sold its investment in Chauncey Group International, Ltd for cost plus accrued interest, yielding cash proceeds of $9,750. Additionally, Sylvan Ventures recorded a gain of $273 upon the exchange of its investment in HigherMarkets for 402 common shares of SciQuest.

        During the three month period ended September 30, 2001, Sylvan Ventures recognized a gain of $24,724 upon the sale of its 42% stake in Classwell Learning Group, Inc. Total proceeds of $31,807 were recorded as a receivable on September 30, 2001, and were subsequently received by Sylvan Ventures in October 2001.

        During the three month period ending June 30, 2001, the Company recorded a loss on investment of $14,231. This charge consisted of a write-off of notes receivable and advances to Caliber Learning Network, Inc. ("Caliber") of $7,497, as well as a charge of $6,734 for estimated liabilities relating to the Company's guarantee of certain non-cancelable Caliber lease obligations and other Caliber related liabilities incurred by the Company. As of September 30, 2002, management believes that its existing reserve balance is sufficient to meet its ultimate unsettled obligations related to Caliber. Due to the uncertainties surrounding the bankruptcy proceedings and the ultimate settlement of Caliber's lease and other liabilities, it is reasonably possible that the Company's loss estimate may change prior to finalization.

14



Note 7—Long Term Debt

        Long-term debt consists of the following:

 
 September 30,
2002

 December 31,
2001

 
Convertible debentures $95,000 $100,000 
Mortgage notes payable for university facilities bearing interest at variable rates ranging from 2.95% to 7.84%  45,519  18,444 
Notes payable secured by fixed assets bearing interest at rates ranging from 2.95% to 3.65%  12,271  9,980 
Long-term credit lines bearing interest at rates ranging from 4.75% to 7.87%  150  214 
Capital lease agreements bearing interest at rates ranging from 4.75% to 27.50%  1,345  601 
Various notes payable bearing interest at fixed rates ranging from 3.00% to 8.00%  7,419  1,684 
  
 
 
   161,704  130,923 
Less: current portion of long-term debt  (17,061) (6,449)
  
 
 
Total long-term debt $144,643 $124,474 
  
 
 

        In August 2002, the Company entered into a new mortgage loan agreement for $6,086 with a bank in Switzerland to finance a portion of the initial cash purchase price of Glion. The mortgage loan bears interest at 2.95% and matures on August 31, 2003. Additionally, in connection with the acquisition of Glion, the Company assumed debt of approximately $26,800, primarily mortgage notes payable, with interest rates ranging from 3.8% to 6.0%.

        On June 30, 2000, the Company issued $100,000 of ten-year convertible subordinated debentures to Apollo Management Group. The debentures bear interest at a fixed rate of 5.00%, payable semi-annually, and are convertible at any time into the Company's common stock at $15.735 per share. The debentures are redeemable by the Company,five years subsequent to June 30, 2003, providing certain conditions are achieved including the average share price exceeding 150% of the conversion price. The debentures mature on June 30, 2010. In the first quarter of 2002, $5,000 of the debentures were converted into 318 shares of the Company's stock.

        The Company has a revolving credit facility (the "Facility") with a group of five banks, which allows the Company to borrow up to an aggregate of $100,000 at variable rates. Outstanding borrowings under the Facility are unconditionally guaranteed by a pledge of the capital stock of the Company's domestic subsidiaries. The Facility expires on December 23, 2003 and there were no borrowings outstanding at September 30, 2002 and December 31, 2001. Debt covenants of the Facility require the Company to maintain certain debt-to-earnings and interest coverage ratios. Other provisions require maintenance of minimum net worth levels and restrict advances, investments, loans, capital expenditures and dividends. At September 30, 2002 the Company was in compliance with the covenants under the Facility.

15



Note 8—Due to Shareholders of Acquired Companies and Other Contingencies

        Due to shareholders of acquired companies consists of the following amounts payable in cash:

 
 September 30,
2002

 December 31,
2001

 
Amounts payable to former shareholders of Drake Prometric $3,050 $3,050 
Amounts payable to former shareholders of Les Roches  1,133  1,029 
Amounts payable to former shareholders of Glion  3,930   
Amounts payable to former shareholders of Learning Center franchises  16,079   
  
 
 
   24,192  4,079 
Less: long-term portion (included in other long-term liabilities)  (3,838) (422)
  
 
 
Total current portion $20,354 $3,657 
  
 
 

        In connection with certain acquisitions, variable amounts of contingent consideration are payable to the sellers based upon specified terms. All existing contingent consideration agreements are predicated upon improved operating profitability of the acquired entities and utilize multiples consistent with those used to calculate the initial purchase price. The Company will record the contingent consideration when the contingencies are resolved and the additional consideration becomes payable.

        Variable amounts of contingent consideration are payable to the seller of Les Roches if specified levels of earnings are achieved in 2002. Variable amounts of contingent consideration are payable to the seller of UDLA inis as follows: 2003 - $1,901; 2004 - $1,741; 2005 - $1,298; 2006 - $1,067 and 2007 if specified levels of earnings are achieved in 2004, 2005 and 2006. Additional purchase consideration of $500 is due to the sellers of UVM in 2003 if 2002 earnings exceed certain specified amounts.- $744.

 The Company has entered into agreements with certain franchisees of Sylvan Learning Centers and Wall Street Institute that allow the franchisees to require the Company to repurchase the centers at a predetermined multiple of operating results upon the achievement of specified operating thresholds. The Company does not believe that these commitments, if ultimately triggered by future events, would materially impact its liquidity.

Note 9—7 – Income Taxes

 

The tax provisions for the ninethree month periods ended September 30,March 31, 2003 and 2002 and 2001 were based on the estimated effective tax rates applicable for the full years, after giving effect to significant items related specifically to the interim periods, including the reported results of Sylvan Ventures'Ventures’ investments accounted for using the equity method.  The Company'sCompany’s income tax provisions for all periods consist of federal, state, and foreign income taxes.  The Company'sCompany’s effective tax rate from continuing operations was 20%37.9% for the ninethree months ended September 30, 2002, excluding the cumulative effect of the change in accounting principle.March 31, 2003.  Due to the volatility of Sylvan Ventures'Ventures’ income and losses, the Company'sCompany’s consolidated effective tax rate may fluctuate from quarter to quarter.  OnHowever, on a full year basis the Company estimates that the effective 2002 income tax rate for the Company prior to the cumulative effect of the change in accounting principle and excluding Sylvan Ventures, will be 30%. The Company estimates that the 2002 effective income tax rateand for Sylvan Ventures, for the year ending December 31, 2003 will be 24%.28.0% and 40.0%, respectively.  Fluctuations in the magnitude and timing of the tax

16



impact of Sylvan Ventures'Ventures’ financial results may cause the Company'sCompany’s consolidated effective income tax rate to vary substantially from the statutory rate.

 The forecasted income tax rate for the Company excluding Sylvan Ventures has decreased from the income tax rate forecasted in the first quarter of 2002 due to the tax benefits associated with the loss recorded in connection with the sale of WSI Spain. The forecasted income tax rate for Sylvan Ventures has decreased from the income tax rate forecasted in the first quarter of 2002 due to the decrease in forecasted losses and the associated tax benefits. The impact of these changes in the estimated effective income tax rates for the three month and nine month periods ended September 30, 2002 was to increase the net loss by approximately $200 and $300, respectively.

At September 30, 2002,March 31, 2003, undistributed earnings of non-U.S. subsidiaries totaled approximately $128,000.$104,300. Deferred tax liabilities have not been recognized for these undistributed earnings because it is management'smanagement’s intention to reinvest such undistributed earnings outside of the U.S.United States.  If all undistributed earnings were remitted to the U.S.,United States, the amount of incremental U.S. federal income taxes, net of foreign tax credits, would be approximately $36,900.$21,400.

17

11



Note 10—Stockholders'8 – Stockholders’ Equity

 

The components of stockholders'stockholders’ equity are as follows:

 
 Common
Stock

 Additional
Paid-In
Capital

 Retained
Earnings

 Accumulated
Other
Comprehensive
Loss

 Total
Stockholders'
Equity

 
Balance at December 31, 2001 $387 $229,386 $342,786 $(26,704)$545,855 
Options exercised for purchase of 1,105 shares of common stock, including income tax benefit of $4,254  11  18,936        18,947 
Issuance of 23 shares of common stock in connection with the employee stock purchase plan     376        376 
Issuance of 318 shares of common stock in connection with the conversion of debentures  3  4,997        5,000 
Issuance of 144 shares of common stock in connection with acquisitions  1  2,999        3,000 
Options granted to non-employees     287        287 
Other equity activity     848        848 
Comprehensive loss:                
 Net loss for the nine months ended September 30, 2002        (89,824)    (89,824)
 Foreign currency translation adjustment           180  180 
 Unrealized loss on available- for-sale securities           (205) (205)
 Minimum pension liability adjustment           (25) (25)
              
 
Total comprehensive loss              (89,874)
  
 
 
 
 
 
Balance at September 30, 2002 $402 $257,829 $252,962 $(26,754)$484,439 
  
 
 
 
 
 

 

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Total
Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2002

 

$

403

 

$

257,926

 

$

246,843

 

$

(19,244

)

$

485,928

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised for purchase of 7 shares of common stock, including income tax benefit of $17

 

 

 

106

 

 

 

 

 

106

 

Issuance of 40 shares of common stock in connection with the employee stock purchase plan

 

 

 

422

 

 

 

 

 

422

 

Issuance of 581 shares of restricted common stock in connection with acquisition of minority interest in Sylvan Ventures LLC

 

6

 

5,148

 

 

 

 

 

5,154

 

Other equity activity

 

1

 

216

 

 

 

 

 

217

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

Net loss for the three months ended March 31, 2003

 

 

 

 

 

(15,971

)

 

 

(15,971

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

990

 

990

 

Unrealized loss on available- for-sale securities

 

 

 

 

 

 

 

18

 

18

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

(14,963

)

Balance at March 31, 2003

 

$

410

 

$

263,818

 

$

230,872

 

$

(18,236

)

$

476,864

 

Expected Stock Option Modification in the Second Quarter of 2003

Certain employees of the Company’s Campus Based segment have been granted options to acquire common stock of the holding company subsidiary comprising the Campus Based segment.  In connection with the restructuring of the Company’s operations resulting from the sale of the K-12 business units and non-strategic Sylvan Ventures assets, the Company has negotiated an agreement with certain key employees holding stock options to acquire common stock of the subsidiary that provides for the exchange of these stock options for stock options to acquire common stock of Sylvan, contingent upon the closing of the sale of the K-12 business units to Educate, Inc.  The Company also expects to offer similar terms to other employees holding options to acquire common stock of the subsidiary.  The result of the exchange of options will not increase the aggregate intrinsic value of the options or reduce the ratio of the exercise price per share of the options to the per share fair value of common stock on the date of exchange, as determined by independent members of the Board of Directors advised by independent valuation experts.

The exchange will be accounted for as a modification of granted stock options, resulting in a new measurement date for the exchanged stock options.  The Company estimates that the modification will result in non-cash compensation expense of approximately $25 million.  The change will be recorded primarily in the quarter the conversion is completed with the balance recorded over any remaining vesting period.

In connection with the sale of the K-12 Education business discussed more fully in Note 4, each unexpired and unexercised outstanding option to purchase shares of the Company’s common stock held by employees who will be employed by Educate, Inc.  will continue to vest for a period of twelve months following the closing of the transaction and will be exercisable for twenty-four months following the closing. This will be accounted for as a modification of granted stock options, resulting in a new measurement date.  The modification will result in non-cash compensation expense in an amount equal to the intrinsic value of such options at the date of closing.  This expense will be included in the Company’s results from discontinued operations.

12



Note 11—9 - Comprehensive Income (Loss)Loss

 

The components of comprehensive income (loss),loss, net of related income taxes, are as follows:

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2002
 2001
 2002
 2001
 
Net income (loss) $(5,691)$8,369 $(89,824)$(16,650)
Foreign currency translation adjustment  (6,087) 9,446  180  (5,275)
Unrealized gain (loss) on available-for-sale securities  (212) 157  (205) (47)
Minimum pension liability adjustment  (42)   (25)  
  
 
 
 
 
Comprehensive income (loss) $(12,032)$17,972 $(89,874)$(21,972)
  
 
 
 
 

18


 

 

Three months ended March 31,

 

 

 

2003

 

2002

 

Net loss

 

$

(15,971

)

$

(79,050

)

Foreign currency translation adjustment

 

990

 

(4,208

)

Unrealized gain (loss) on available-for-sale securities

 

18

 

(156

)

Comprehensive loss

 

$

(14,963

)

$

(83,414

)

Note 12—Earnings (Loss)10 – Loss Per Share

 

The following table summarizes the computations of basic and diluted earnings (loss)loss per common share:

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2002
 2001
 2002
 2001
 
Numerator used in basic earnings (loss) per common share:             
 Income (loss) before cumulative effect of change in accounting principle $(5,691)$8,369 $(11,190)$(16,650)
 Cumulative effect of change in accounting principle      (78,634)  
  
 
 
 
 
 Net income (loss) $(5,691)$8,369 $(89,824)$(16,650)
  
 
 
 
 
Numerator used in diluted earnings (loss) per common share:             
 Income (loss) before cumulative effect of change in accounting principle $(5,691)$8,369 $(11,190)$(16,650)
 Add: Interest expense from assumed conversion of convertible debentures, net of tax    825     
  
 
 
 
 
 Income (loss) before cumulative effect of change in accounting principle, after assumed conversion of convertible debentures  (5,691) 9,194  (11,190) (16,650)
 Cumulative effect of change in accounting principle      (78,634)  
  
 
 
 
 
  $(5,691)$9,194 $(89,824)$(16,650)
  
 
 
 
 
Denominator:             
 Weighted average common shares outstanding  40,331  38,472  39,960  37,937 
 Net effect of dilutive stock options based on treasury stock method using average market price    1,726     
 Effect of convertible debentures    6,355     
  
 
 
 
 
 Weighted average common shares outstanding and additional dilution from common stock equivalents  40,331  46,553  39,960  37,937 
  
 
 
 
 
Earnings (loss) per common share, basic:             
 Income (loss) before cumulative effect of change in accounting principle $(0.14)$0.22 $(0.28)$(0.44)
 Cumulative effect of change in accounting principle      (1.97)  
  
 
 
 
 
 Net income (loss) $(0.14)$0.22 $(2.25)$(0.44)
  
 
 
 
 
Earnings (loss) per common share, diluted:             
 Income (loss) before cumulative effect of change in accounting principle $(0.14)$0.20 $(0.28)$(0.44)
 Cumulative effect of change in accounting principle      (1.97)  
  
 
 
 
 
 Net income (loss) $(0.14)$0.20 $(2.25)$(0.44)
  
 
 
 
 

19


 

 

 

Three months ended March 31,

 

 

 

2003

 

2002

 

Numerator used in basic and diluted loss per common share:

 

 

 

 

 

Loss from continuing operations, before cumulative effect of change in accounting principle

 

$

(13,142

)

$

(1,916

)

Income from discontinued operations, net of tax

 

2,388

 

1,500

 

Loss on disposal of discontinued operations, net of tax

 

(5,217

)

 

Cumulative effect of change in accounting principle, net of tax

 

 

(78,634

)

Net loss

 

$

(15,971

)

$

(79,050

)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Weighted average common shares outstanding

 

40,477

 

39,421

 

Net effect of dilutive stock options based on treasury stock method using average market price

 

 

 

Effect of convertible debentures

 

 

 

Weighted average common shares outstanding and additional dilution from common stock equivalents

 

40,477

 

39,421

 

 

 

 

 

 

 

Earning (loss) per common share, basic and diluted:

 

 

 

 

 

Loss from continuing operations, before cumulative effect of change in accounting principle

 

$

(0.33

)

$

(0.05

)

Income from discontinued operations, net of tax

 

0.06

 

0.04

 

Loss on disposal of discontinued operations, net of tax

 

(0.12

)

 

Cumulative effect of change in accounting principle, net of tax

 

 

(2.00

)

Net loss per common share, basic

 

$

(0.39

)

$

(2.01

)

Stock options and the convertible debentures were not dilutive for the three month and nine month periods ended September 30,March 31, 2003 and 2002 and the nine month period ended September 30, 2001 as the Company reported a net loss.

Note 13—11 - Contingencies

 On November 18, 1996, ACT, Inc. filed suit against the Company alleging that the Company violated federal antitrust laws and committed various state law torts in connection with the operations of its computer-based testing operations and in obtaining a testing services contract from the National Association of Securities Dealers ("NASD"). The trial court granted the Company's motion for summary judgment and ACT, Inc. filed its appeal of the decision to the U.S. Court of Appeals for the Eighth Circuit. On July 11, 2002, the U.S. Court of Appeals for the Eighth Circuit affirmed the decision of the trial court on all counts. The decision of the Eighth Circuit is now the final decision in the case.

The Company is subject to other legal actions arising in the ordinary course of its business.  In management'smanagement’s opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe any settlement would materially affect the Company'sCompany’s financial position.

Guarantees

The Company has guaranteed the bank loans of certain K-12 business franchisees.  These loans primarily represent the financing of programs and other purchased instructional materials.  Of the $1,757 of available credit under these loans,

13



the outstanding balance was $610 at March 31, 2003.  This guarantee will be assumed by Educate, Inc. when the sale of the K-12 business division is final.

The Company has guaranteed a $2,000 bank line of credit of an affiliate.  There were no borrowings outstanding as of March 31, 2003 and the line of credit expires on February 29, 2004. This guarantee will be assumed by Educate, Inc. when the sale of the K-12 business division is final.

The Company has guaranteed equipment leases of certain affiliates.  As of March 31, 2003, the amount payable by the affiliates under these leases was $630.  $544 of these equipment guarantees will be assumed by Educate, Inc. when the sale of the K-12 business division is final.

The Company has entered into an agreement with a third party to provide course materials.  Payment is due upon sale of the course materials to franchisees.  Under the terms of the agreement, the Company has guaranteed certain annual minimum payments of  $264, to be paid quarterly.  At March 31, 2003, the amount remaining to be paid under the agreement is $900.

Contingent Payments and Business Combinations

In the normal course of business, the Company is party to option agreements with franchisees that allow, under specified circumstances, the repurchase of operating franchises at predetermined multiples of operating results.  These options may be at the Company’s or the franchisee’s discretion based upon the individual agreement and specific operating criteria.  None of these option agreements would be individually material and operating results of the Company would not be materially impacted for the current period if the options were exercised.

The Company is self-insured for health care, workers compensation, and other insurable risks up to predetermined amounts above which third party insurance applies.  The Company records estimates of its self-insured benefits liability at each balance sheet date.  The Company is contingently liable to insurance carriers under certain of these policies and has provided a letter of credit in favor of the insurance carriers for approximately $1,300.

Note 14—12 – Business Segment Information

 During the three month period ended June 30, 2002,

The Company is a leading international provider of post-secondary educational services.  On March 10, 2003, the Company realigned its English Language Instruction segment to include onlyannounced that it would sell the operations comprising its K-12 education business units and committed to a plan to sell certain investments in Sylvan Ventures.  Prior to March 2003, the Company was organized on the basis of WSI Spain.educational services provided, including K-12 business services, online higher education, international universities, English language instruction – Spain, and Sylvan Ventures.  As a result of the realigned business operations, the Company is now managing its operations through three separate business segments: a campus-based university segment, an online university segment and Sylvan Ventures.  These operations were sold effective July 1, 2002. The remaining English Language Instructionsegments are business is included in the International

20



Universities segment. Historicalunits that offer distinct services and are managed separately as they have different customer bases and delivery channels.  All historical segment information has been reclassified to conform to this presentation.  The reportable segments are as follows:

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2002
 2001
 2002
 2001
 
Operating revenues:             
 K-12 Education Services $48,288 $38,143 $161,831 $139,464 
 Online Higher Education  15,520  12,756  37,810  31,194 
 International Universities  60,707  49,646  206,258  162,015 
 English Language Instruction-Spain    4,373  6,964  14,710 
 Sylvan Ventures  6,948  141  16,390  204 
  
 
 
 
 
  $131,463 $105,059 $429,253 $347,587 
  
 
 
 
 
Segment operating profit (loss):             
 K-12 Education Services $9,790 $7,083 $34,387 $28,160 
 Online Higher Education  5,017  3,286  9,502  6,288 
 International Universities  1,485  1,840  17,847  12,140 
 English Language Instruction-Spain  (3,000) (192) (22,597) 1,539 
 Sylvan Ventures  (8,012) 7,228  (25,172) (41,202)
  
 
 
 
 
  $5,280 $19,245 $13,967 $6,925 
  
 
 
 
 

 

 

Three months ended March 31,

 

 

 

2003

 

2002

 

Operating revenues:

 

 

 

 

 

Campus Based

 

$

90,790

 

$

72,235

 

Online

 

17,496

 

9,010

 

Sylvan Ventures

 

435

 

 

Other

 

 

3,635

 

 

 

$

108,721

 

$

84,880

 

 

 

 

 

 

 

Segment profit (loss):

 

 

 

 

 

Campus Based

 

$

8,404

 

$

7,905

 

Online

 

(2,465

)

(1,792

)

Sylvan Ventures

 

(9,513

)

(3,115

)

Other

 

 

(917

)

 

 

$

(3,574

)

$

2,081

 

 

14



 

 

Segment Assets

 

Goodwill

 

 

 

March 31,
2003

 

December 31,
2002

 

March 31,
2003

 

December 31,
2002

 

 

 

 

 

 

 

 

 

 

 

Campus Based

 

$

539,549

 

$

503,389

 

$

108,180

 

$

106,708

 

Online

 

184,655

 

184,052

 

86,159

 

86,309

 

Sylvan Ventures

 

9,185

 

27,065

 

 

98

 

 

 

$

733,389

 

$

714,506

 

$

194,339

 

$

193,115

 

“Other” above represents the results of operations of WSI-Spain, a business that was sold effective July 1, 2002.  Segment operating profit (loss) is calculated as net operating profit (loss) for operating segments.  Segment profit for Sylvan Ventures is calculated as the sum of itsthe revenues, operating costs, general and administrative expenses, net investment income (loss) and equity in net loss of affiliates. Similar to its relationship with other university partners, Canter and Associates (which is included in the Online Higher Education segment) and Walden (which is included in the Sylvan Ventures segment) have entered into a formal agreement in which Canter markets and distributes its teacher training courses through a graduate degree program at Walden University for a percentage of the gross tuition fees, determined at market rates, associated with this program. For the three month and nine month periods ended September 30, 2002, consolidated earned tuition fees from this program totaled $2,051 and $3,182, respectively.

21



There are no significant inter-company sales or transfers. The following table reconciles the reported information on segment profit (loss) to income (loss) before income taxes reported in the consolidated statements of operations:

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2002
 2001
 2002
 2001
 
Total profit for reportable segments $5,280 $19,245 $13,967 $6,925 
Corporate general and administrative expense  (5,207) (5,643) (16,028) (17,530)
Other expense and minority interest, net  (7,598) (997) (11,952) (15,741)
  
 
 
 
 
Income (loss) before income taxes and cumulative effect of change in accounting principle $(7,525)$12,605 $(14,013)$(26,346)
  
 
 
 
 
 
 Segment Assets
 Goodwill
 
 September 30,
2002

 December 31,
2001

 September 30,
2002

 December 31,
2001

K-12 Education Services $133,975 $106,184 $79,033 $45,128
Online Higher Education  104,203  101,517  68,169  67,691
International Universities  449,071  379,053  99,007  142,827
English Language Instruction-Spain    65,596    29,951
Sylvan Ventures  92,584  70,430  34,800  
  
 
 
 
  $779,833 $722,780 $281,009 $285,597
  
 
 
 

 The decrease in goodwill at September 30, 2002 is primarily due to the impairment of certain Wall Street Institute amounts, partially offset by the acquisition of Sylvan Learning Centers franchises in the K-12 Education Services segment, the acquisition of Marbella and Glion in the International Universities segment, and the acquisition of additional Walden ownership interest which resulted in its consolidation in the Sylvan Ventures segment.

 

 

Three months ended March 31,

 

 

 

2003

 

2002

 

Total profit (loss) for reportable segments

 

$

(3,574

)

$

2,081

 

Corporate general and administrative expense

 

(5,794

)

(5,109

)

Loss on Sylvan Ventures assets held for sale

 

(8,394

)

 

Other income (expense) and minority interest, net

 

(3,392

)

(1,579

)

Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle

 

$

(21,154

)

$

(4,607

)

2215




ITEM 2.MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

 

The statements contained herein include forward-looking statements.  Forward-looking statements include information about possible or assumed results of operations, business strategies, financing plans, competitive position and potential growth opportunities.  Forward-looking statements include all statements that are not historical facts and are generally accompanied by words such as "may," "will," "intend," "anticipate," "believe," "estimate," "expect," "should"“may,” “will,” “intend,” “anticipate,” “believe,” “estimate,” “expect,” “should” or similar expressions.  These statements also relate to the Company'sCompany’s contingent payment obligations relating to acquisitions, future capital requirements, potential acquisitions and the Company'sCompany’s future development plans and are based on current expectations.  Forward-looking statements involve various risks, uncertainties and assumptions.  The Company'sCompany’s actual results may differ materially from those expressed in these forward-looking statements.

 

Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors.  These factors may include, without limitation: the Company'sCompany’s ability to continue to make acquisitions and to successfully integrate and operate acquired businesses; changes in student enrollment; the development and expansion of theour franchise system and the effect of new technology applications in the educational services industry; failure to maintain or renew required regulatory approval, accreditation or state authorizations; the Company'sCompany’s ability to effectively manage business growth; possible increased competition from other educational service providers; the effect on the business and results of operations of fluctuations in the value of foreign currencies; and the many risks associated with the operation of an increasingly global business, including complicated legal structures, foreign currency, legal, tax and economic risks and the risk of changes in the business climate in the markets where the Company operates.  In addition, the proposed sale transactions described below are subject to customary conditions and there can be no assurance that the transactions will be consummated.  Among the conditions to consummation of the transactions are regulatory approvals and consents of third parties that are outside the control of the parties. These forward-looking statements are based on estimates, projections, beliefs and assumptions of management and speak only as of the date made and are not guarantees of future performance.

Overview

 

Pending Sale of Business Units

Sylvan Learning Systems, Inc. and subsidiaries (the "Company"“Company” or "Sylvan"“Sylvan”) is a leading international provider of post-secondary educational servicesservices. On March 10, 2003 the Company announced that it would sell the operations comprising its K-12 education business units (“K-12 segment”) and committed to families and schools.a plan to sell certain investments in Sylvan Ventures that are not strategic to its post-secondary education business in a transaction more fully described below.  In connection with this announcement, the Company realigned its business segments.  The Company provides lifelong educational services through fivethree separate business segments. The K-12 Education Servicessegments: a campus-based university segment includes: Sylvan Learning Centers, which designs and delivers individualized tutorial programs to school-aged children through franchised and Company-owned learning centers; Schülerhilfe, a major provider of tutoring services in Germany;(“Campus Based”), an online university segment (“Online”), and Sylvan Education Solutions, which principally provides educational programs to students of public and non-public school districts through contracts funded by Title I and state-based programs.Ventures.  The Online Higher Education segment provides professional development and graduate degree programs to teachers through Canter and Associates and Sylvan Teacher Institute. The International UniversitiesCampus Based segment owns or maintains controlling interests in sevensix private universities located in Spain, Switzerland, Mexico, Chile and France and also includes the non-Spain operations of Wall Street Institute ("WSI"(“WSI”), a European-based franchiser and operator of learning centers that teach the English language in the post-secondary market.  The English Language Instruction-SpainOnline segment consisted ofprovides professional development and graduate degree programs to teachers through Canter and Associates. Online also includes the operations of WSI located in Spain, a business that was sold in the third quarterWalden E-Learning, Inc. (“Walden”) and National Technological University (“NTU”), which were previously reported as part of 2002.Sylvan Ventures. The Sylvan Ventures segment investsincludes investments in and developscertain education technology companies that are creating emerging technology solutions for the education marketplace, and consolidates the operations of EdVerify (“EdVerify”), Inc. and Educational Satellite Services, Inc. (“ESS”), majority-owned subsidiaries.  The Company plans to dispose of all remaining investments of the Sylvan Ventures segment, including EdVerify and ESS.

On March 10, 2003, the Company and Educate, Inc., a company newly formed by Apollo Management, L.P, (“Apollo”) executed an Asset Purchase Agreement that provided for the acquisition by Educate, Inc. of substantially all of the Company’s K-12 education business units, including eSylvan, Inc., Walden E-Learning, Inc. ("Walden"), and Connections Academy, Inc., which are investments held by Sylvan Ventures.  The consideration for the sale of the assets comprising the K-12 business units will consist of the following at closing:

16



                  Cash of $112.0 million to $117.0 million, plus an amount equal to the difference between $72.5 million and EdVerify, Inc.,the conversion value of the convertible debentures issued by the Company and surrendered by Apollo at closing, less any accrued and unpaid interest on the debentures, plus deferred payments of approximately $3.0 million;

                  A subordinated note in the amount of $55.0 million, bearing interest at 12% per annum and maturing in 2009;

                  The surrender of convertible debentures issued by the Company with a conversion value of up to $72.5 million;

                  The assumption of trade accounts payable of the K-12 business units, and other specified liabilities of the K-12 business units;

                  Apollo’s 25% preferred interest in Sylvan Ventures.

Additionally, the proceeds received by the Company are subject to post closing adjustments for specified changes in working capital from the date of the agreement to the closing date.  The Company is also eligible for up to $10.0 million of additional consideration if certain operations of Connections Academy exceed specified levels of earnings any time prior to December 31, 2007.  The transaction will result in the elimination of various consent and governance rights that had been held by Apollo.  Apollo’s representation on the Company’s Board of Directors will be reduced from two board seats to one.

In a separate transaction, Sylvan acquired the remaining membership interest in Sylvan Ventures not owned by Sylvan or Apollo for consideration of 581,000 shares of Sylvan stock, which is restricted from sale for three years. These membership interests were held by a group of investors, including certain executives of the Company.  Additionally, all membership profit interests in Sylvan Ventures have been eliminated.  Upon completion of these acquisitions and the sale of the K-12 business units, the Company will own all of the membership interests of Sylvan Ventures LLC. The Sylvan Ventures investments that are non-strategic to the post-secondary business are now held for sale.  The remaining investments of Sylvan Ventures will include the consolidated investments in Walden and NTU, which will be managed and reported within the Online segment, and a $2.4 million note receivable that will mature over the next two years.

The Company, after the sale of substantially all of its K-12 business units, will hold for sale its remaining K-12 assets, consisting of the Company’s Sylvan Learning Center operations in the United Kingdom and France.  The Company expects to sell these two operations, principally for contingent amounts of future consideration, by December 31, 2003.

The transactions were negotiated and approved by a committee of Sylvan’s Board of Directors composed solely of independent directors.  Credit Suisse First Boston LLC and U.S. Bancorp Piper Jaffray, Inc. were financial advisors to the committee of independent directors.  The Apollo transaction is subject to legal and regulatory approvals and is expected to close by June 30, 2003.

As a result of these expected transactions, the Company estimates that it will record (i) a yet to be determined gain from the disposition of its K-12 business units upon closing of the sale to Educate, Inc.  (expected to be in the second quarter of 2003), representing the difference between the carrying value of the net assets sold (approximately $111.0 million at March 31, 2003) and net proceeds upon sale.

The operations of the Company’s disposal groups comprising its K-12 business units have been classified as discontinued operations beginning in the first quarter of 2003. Because the operations and cash flows of these groups will be eliminated from the ongoing operations of the Company as a result of the disposal transactions, and because the Company will not have any significant continuing involvement in the held for sale operations after the disposal transactions, the results of operations of these operations will be reported for all periods as a separate component of income, net of income taxes.

These transactions present a number of risks and uncertainties, including the possibility that the transactions will not be completed due to legal, regulatory or other reasons.  If these transactions are majority-owned subsidiaries.completed, the Company’s overall business will be significantly smaller and will consist exclusively of the international and online university business.  Following completion of these transactions, most of the Company’s business operations will be in foreign countries, which increases the potentially negative effects on the Company of the many risks of doing business in foreign countries.

Expected Stock Option Modification in the Second Quarter of 2003

Certain employees of the Company’s International University segment previously were granted options to acquire common stock of the holding company subsidiary comprising the Campus Based segment (the “BV”).  Due to the

17



restructuring of the Company’s operations resulting from the sale of the K-12 business units and non-strategic Sylvan Ventures assets, the Company has negotiated an agreement with certain key employees holding stock options to acquire common stock of the BV exchange these stock options for stock options to acquire common stock of Sylvan, contingent upon the closing of the sale of the K-12 business units to Educate LLC.  The Company also expects to offer similar terms to other employees holding options to acquire common stock of the BV.  The result of the exchange of options will not increase the aggregate intrinsic value of the options or reduce the ratio of the exercise price per share of the options to the per share fair value of common stock on the date of exchange, as determined by independent members of the Board of Directors on the advice of  independent valuation experts.

The exchange will be accounted for as a modification of granted stock options, resulting in a new measurement date for the exchanged stock options.  The Company estimates that the modification will result in non-cash compensation expense of approximately $25 million.  The change will be recorded primarily in the quarter the conversion is completed (most likely in the second quarter of 2003) with the balance recorded over any remaining vesting period.

In connection with the sale of the K-12 Education business, each unexpired and unexercised outstanding option to purchase shares of the Company’s common stock held by employees who will be employed by Educate, Inc. will continue to vest for a period of twelve months following the closing of the transaction and will be exercisable for twenty-four months following the closing. This will be accounted for as a modification of granted stock options, resulting in a new measurement date.  The modification will result in non-cash compensation expense in an amount equal to the intrinsic value of such options at the date of closing of the sale of Educate, Inc. This expense will be included in the Company’s results from discontinued operations.

Results of Operations

 

Revenues generated by Sylvan's fiveSylvan’s three continuing business segments are described as follows: K-12 Education Services primarily earns franchise royalties, franchise sales fees, Company-owned learning center

23



revenues and contract-based revenues from providing supplemental remedial education services to public and non-public schools; Online Higher Education primarily earns revenues from providing teacher training products and distance-learning instructional services;Campus Based (formerly named International UniversitiesUniversities) earns tuition and related fees paid by the students of Universidad Europea de Madrid ("UEM"(“UEM”), Universidad del Valle de Mexico ("UVM"(“UVM”), Universidad de Las Americas ("UDLA"(“UDLA”) and, École Supérieure du Commerce Extérieur ("ESCE"(“ESCE”) as well as students from Swiss Hotel Association Hotel Management School Les Roches ("(“Les Roches"Roches”), Escuela Superior De Alta Gestion De Hotel, S.A. ("Marbella"(“Marbella”) and Glion Hotel School, S.A. ("Glion"(“Glion”) (collectively, "The“The Hospitality Group"Group”), in addition to franchise royalties, Company-owned center revenues and franchise salessale fees related to WSI operations outside of Spain; English Language Instruction-Spain earned franchise royalties, Company-owned centerOnline earns revenues and franchise sales fees related to the WSI business in Spain prior to the salefrom instructional services that are provided through an online format, as well as other forms of the segment;distance learning. and Sylvan Ventures primarily earns tuition and related fees froma small amount of revenues on satellite services provided to a number of universities. In connection with the studentsCompany’s March 10, 2003 announcement that it would sell the operations comprising its K-12 education business units, the operations of Walden and eSylvan.the Company’s disposal groups comprising its K-12 business units are classified as discontinued operations for all periods presented.

 

18



The following table sets forth the percentage relationships of operating revenues and direct costs for each segment, as well as certain income statement line items expressed as a percentage of total revenues for the periods indicated:indicated.

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2002
 2001
 2002
 2001
 
Revenues:         
 K-12 Education Services 37%37%38%40%
 Online Higher Education 12%12%9%9%
 International Universities 46%47%48%47%
 English Language Instruction-Spain  4%1%4%
 Sylvan Ventures 5% 4% 
  
 
 
 
 
   Total revenues 100%100%100%100%
Direct costs:         
 K-12 Education Services 29%30%30%32%
 Online Higher Education 8%9%7%7%
 International Universities 45%45%44%43%
 English Language Instruction-Spain  4%2%4%
 Sylvan Ventures 10%3%8%3%
  
 
 
 
 
   Total direct costs 92%91%91%89%
General and administrative expenses:         
 Core operating segments 4%5%4%5%
 Sylvan Ventures 1%2%1%2%
Loss on assets sold 2% 4% 
  
 
 
 
 
Operating income 1%2% 4%
Non-operating income (expense) (including net loss of Ventures affiliates) (6)%10%(4)%(12)%
  
 
 
 
 
Income (loss) before income taxes and cumulative effect of change in accounting principle (5)%12%(4)%(8)%
Income tax benefit (expense) 1%(4)%1%3%
  
 
 
 
 
Income (loss) before cumulative effect of change in accounting principle (4)%8%(3)%(5)%
Cumulative effect of change in accounting principle   (18)% 
  
 
 
 
 
Net income (loss) (4%)8%(21)%(5)%
  
 
 
 
 

24

 

 

Three months ended March 31,

 

 

 

2003

 

2002

 

Revenues:

 

 

 

 

 

Campus Based

 

84

%

85

%

Online

 

16

%

11

%

Sylvan Ventures

 

 

 

Other (1)

 

 

4

%

Total revenues

 

100

%

100

%

Direct costs:

 

 

 

 

 

Campus Based

 

76

%

76

%

Online

 

18

%

13

%

Sylvan Ventures

 

1

%

 

Other (1)

 

 

5

%

Total direct costs

 

95

%

94

%

 

 

 

 

 

 

General and administrative expenses:

 

 

 

 

 

Core operating segments

 

5

%

6

%

Sylvan Ventures

 

2

%

1

%

 

 

 

 

 

 

Operating loss

 

(2

)%

(1

)%

Loss on Sylvan Ventures assets held for sale

 

(7

)%

 

Non-operating expenses (including equity in net loss of Ventures affiliates)

 

(10

)%

(4

)%

Income (loss) from continuing operations  before income taxes and cumulative effect of change in accounting principle

 

(19

)%

(5

)%

Income tax expense

 

7

%

3

%

Income (loss) from continuing operations

 

(12

)%

(2

)%

Income (loss) from discontinued operations, net of tax

 

2

%

2

%

Gain (loss) on disposal of discontinued operations, net of tax

 

(5

)%

 

Income (loss) before cumulative effect of change in accounting principle

 

(15

)%

 

Cumulative effect of change in accounting principle, net of tax

 

 

(93

)%

Net income (loss)

 

(15

)%

(93

)%


(1) Other represents the results of operations of the English Language Instruction Spain business that was sold effective July 1, 2002.

19



The following comparisons of results of operations focus on the continuing operations of the Company.

Comparison of results for the three months ended September 30, 2002March 31, 2003 to results for the three months ended September 30, 2001.March 31, 2002.

Revenues.  Total revenues from continuing operations increased by $26.4$23.8 million, or 25%28%, to $131.5$108.7 million for the three months ended September 30, 2002March 31, 2003 (the "2002“2003 fiscal quarter"quarter”) from $105.1$84.9 million for the three months ended September 30, 2001March 31, 2002 (the "2001“2002 fiscal quarter"quarter”).  This revenue increase was primarily driven by increases related to increased enrollments in both the Campus Based segment and the Online segment universities and the acquisitions of Marbella effective  March 1, 2002  and Glion effective August 1, 2002.

Campus Based revenue for the 2003 fiscal quarter increased by $18.6 million, or 26%, to $90.8 million compared to the 2002 fiscal quarter. This increase was primarily due to higher tuition and enrollmentenrollments at the universities in the International Universities segment, acquisitions of learning centersMexico, Spain and same center revenue growth in the K-12 Education Services segment.

K-12 Education ServicesChile.  Additionally, revenue increased by $10.1$6.8 million due to the acquisition of controlling interests in Marbella and Glion, which occurred in the first and third quarters of 2002 respectively.  Non-Spain WSI revenues increased $2.8 million, primarily due to acquisitions of centers in Italy and Germany, which occurred during the first quarter of 2003, as well as higher royalties from franchises in Italy and Germany.  Operating revenue for Campus Based represented 84% of the Company’s total revenues for the 2003 fiscal quarter.

Online revenue increased by $8.5 million, or 27%94%, to $48.3$17.5 million for the 20022003 fiscal quarter compared to the 20012002 fiscal quarter.  Franchise royaltiesCanter teacher-training revenue increased by $1.2 million, or 22%, in 2002 as a result of a net increase of 23 new learning centers opened after September 30, 2001 and a 20% increase in same center revenue. Same center revenue growth was driven by the success of national advertising programs, favorable third-party financing alternatives and increased length of stay. Revenues from Company-owned learning centers increased $9.0$2.9 million, or 52%, to $26.4$8.5 million during the 2002 fiscal quarter. Same center revenues increased 20%, or $3.1 million, with the remaining revenue increase of $5.9 million generated from 35 Company-owned centers acquired from franchise owners and 2 new centers opened during the past year. International revenues, primarily Schülerhilfe, increased by $0.5 million, or 17%, in the 20022003 fiscal quarter compared to the 2001 fiscal quarter. Contract-based revenues decreased by $0.6 million, or 7%, to $7.9 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter due to a lower number of public school contracts. Operating revenue for K-12 Education Services represents 37% of total revenues of the Company for the 2002 fiscal quarter.

Online Higher Education revenue increased by $2.8 million, or 22%, to $15.5 million for the 2002 fiscal quarter compared to the 2001 fiscal quarter. Canter teacher training revenue increased by $3.1 million, or 26%, to $15.3 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter. The Canter revenue increase was due to greater product demand, particularlya change in recognition of the distance learning masters programs,Walden program revenue during the current 2003 fiscal quarter compared to the 2002 fiscal quarter.  Canter revenue related to its program with Walden is now recognized as the term progresses, as compared to other university partner revenue, which saw enrollments for the summer 2002 semester increase by 22% to 12,100 students. Sylvan Teacher Institute revenue decreased by $0.3 million, or 58%, to $0.2 millionis recognized upon shipment of materials.  This change was implemented in the 2002 fiscal quarter comparedsubsequent to Sylvan’s acquiring a controlling interest in Walden to reflect the 2001 fiscal quarter. The decrease was dueconsolidation of Walden’s operations into those of the Company. Walden revenue increased by $3.6 million, or 104%, to a planned decrease in professional development workshops performed$7.0 million in the 20022003 fiscal quarter compared to the 20012002 fiscal quarter.  The Walden revenue increase was due to an additional month of revenue in the 2003 fiscal quarter since the Company increased its ownership of Walden to 51% in February 2002.  Additionally, Walden had higher enrollments in the 2003 fiscal quarter compared to the 2002 fiscal quarter due to four new programs and increased enrollments in existing programs. The remaining increase of $2.0 million was due to the acquisition of NTU effective November 1, 2002.   Operating revenue for Online  Higher Education represents 12%represented 16% of the Company’s total revenues  of the Company for the 20022003 fiscal quarter.

 

International UniversitiesSylvan Ventures revenue for the 2002 fiscal quarter increased by $11.1 million, or 22%, to $60.7 million compared to the 2001 fiscal quarter. This revenue increase was driven by increased tuition and enrollments at each of the universities, particularly at UDLA and UVM, which increased their enrollments by 51% and 31%, respectively, compared to the 2001 fiscal quarter. Additionally, revenue increased by $5.8 million due to the acquisitions of controlling interests in ESCE, Marbella and Glion, which occurred after the 2001 fiscal quarter and, therefore, did not contribute to revenue for the 2001 fiscal quarter. Operating revenue for International Universities represents 46% of total revenues of the Company for the 2002 fiscal quarter.

English Language Instruction-Spain revenue decreased by $4.4$0.4 million for the 2002 fiscal quarter as the Company sold its English language Instruction business in Spain, effective July 1, 2002.

Sylvan Ventures revenue increased to $6.9 million for the 2002 fiscal quarter from $0.1 million in the 20012003 fiscal quarter.  Revenues inThe increase was attributable to EdVerify, Inc. and ESS, Inc. revenues due to consolidating acquisitions over the 2002 fiscal quarter were generated from Walden ($5.8 million), eSylvan ($0.9 million) and Connections Academy ($0.2 million). Prior to February 2002, Walden was accounted for under the equity method.past nine months. Operating revenues for Sylvan Ventures represents 5%less than 1% of the Company’s total revenues offor the Company for2003 fiscal quarter

Other the English Language Instruction  Spain business was sold effective July 1, 2002 and therefore had no revenue in the 2003 fiscal quarter compared to $3.6 million in the 2002 fiscal quarter.

25



Direct Costs.  Total direct costs of revenues from continuing operations increased $24.9$24.1 million, or 26%30%, to $121.1$103.8 million for the 20022003 fiscal quarter from $96.2$79.7 million for the 2001 fiscal quarter. Excluding the impact of goodwill amortization in the 2001 fiscal quarter of $2.8 million, direct costs increased $27.7 million, or 30%,  for the 2002 fiscal quarter. Direct costs as a percentage of total revenues increasedwere 95% in the 2003 fiscal quarter compared to 92%94% in the 2002 fiscal quarter from 91% in the 2001 fiscal quarter. Excluding the impact of goodwill amortization, direct costs as a percentage of revenues were 89% in the 2001 fiscal quarter.

 

K-12 Education ServicesCampus Based expenses increased $7.4by $18.1 million to $38.5$82.4 million, or 80%91% of K-12 Education ServicesCampus Based revenue for the 2003 fiscal quarter, compared to $64.3 million, or 89% of Campus Based revenue for the 2002 fiscal quarter, compared to $31.1 million, or 81% of K-12 Education Services revenue for the 2001 fiscal quarter.  Approximately $6.6 million of the 2002 fiscal quarter increase related to expenses incurred in Company-owned learning centersExpenses have increased due to the acquisitionincreased volume of 35 franchised learning centers, the opening of 2 new centersenrollments and costs associated with higher revenues at existing Company-owned centers. International expenses, primarily related to Schülerhilfe, increased $0.1 million. Franchise support costs increased $1.5 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter. These expense increases were partially offset by a decrease in contract-based expenses of $0.6 million in the 2002 fiscal quarter compared to the 2001 fiscal quarter, which was consistent with the decrease in revenue over the same period and improved cost controls for the existing business.

Online Higher Education expenses increased by $1.0 million to $10.5 million, or 68% of Online Higher Education revenue for the 2002 fiscal quarter, compared to $9.5 million, or 74% of Online Higher Education revenue for the 2001 quarter. The decrease in expenses as a percentage of revenue for the 2002 fiscal quarter was primarily due to the adoption of Statement No. 142 in 2002, which discontinued the amortization of goodwill. The amortization of goodwill related to the Canter acquisition was $0.8 million in the 2001 fiscal quarter, or 6% of Online Higher Education revenue for the 2001 fiscal quarter.

International Universities expenses increased by $11.4 million to $59.2 million, or 98% of International Universities revenue for the 2002 fiscal quarter, compared to $47.8 million, or 96% of International Universities revenue for the 2001 fiscal quarter. The increase in expenses reflects i) a higher volume of operating activities at the universities compared to the 20012002 fiscal quarter; ii)quarter and the effect of the acquisitions of ESCE,controlling interests in Marbella and Glion, which occurred afterin the first and third quarterquarters of 2001; iii) an2002, respectively.  The increase in overhead costs, including staffing expenses as a resultpercentage of the increase in the volume of business, iv) an increase in marketing campaign expenses relatedrevenue was primarily due to efforts associated with recruiting new students, primarily at UEM and v) an increase in expenses atreduced margins from non-Spain WSI primarily associated with the acquisition of centers in Portugal.Portugal and university start-up efforts in India and China.  The timing of summer semester breaks results in significant seasonal fluctuations in operating results dependingbased primarily on the geographicalgeographic location of the individual university. Revenues and direct instructional expenses are recorded during the period that classes are in session; however, certain basic operating and marketing expenses continue during the semester break, which distorts quarterly comparisons of expenses as a percentage of revenues.

 

20



English Language Instruction-SpainOnline expenses decreasedincreased by $4.6$9.2 million to $20.0 million, or 114% of Online revenue for the 2003 fiscal quarter, compared to $10.8 million, or 120% of Online revenue for the 2002 fiscal quarter as the Company sold its English Language Instruction business in Spain effective July 1, 2002.

Sylvan Ventures operatingquarter. Canter expenses increased by $2.4 million to $12.8$9.5 million, or 111% of revenue in the 2003 fiscal quarter compared to $7.1 million or 126% of revenue in the 2002 fiscal quarter.  Walden expenses increased by $3.4 million to $7.1 million, for the 2003 fiscal quarter compared to $3.7 million in the 2002 fiscal quarter from $3.3quarter. The Walden expense increase was due to an additional month of expenses in the 2003 fiscal quarter. The remaining increase of $3.4 million was due to the acquisition of NTU effective November 1, 2002.

Sylvan Ventures expenses increased to $1.5 million in the 20012003 fiscal quarter as a result of operating costs related to the consolidationacquisitions of WaldenEdVerify, Inc. and EdVerify direct costs for the 2002 fiscal quarter. Operating expenses are comprised of the expenses of the revenue generating consolidated investments in eSylvan ($4.0 million), Walden ($6.9 million), Connections Academy ($1.0 million) and EdVerify ($0.9 million). Prior to FebruaryESS, Inc.

Other The English Language Instruction  Spain business was sold effective July 1, 2002 and June 2002, respectively, Walden and EdVerify were accounted for undertherefore had no expenses in the equity method. Since Connections Academy began to generate revenues in September 2002, its expenses are now reported as operating expenses of Sylvan Ventures, but were previously reported as general and administrative expenses.

26



eSylvan's direct costs increased by $1.1 million in comparison to the 20012003 fiscal quarter duecompared to expansion of services and operations.

        Other Expenses.    Core operating segment general and administrative expenses decreased by $0.4$3.6 million in the 2002 fiscal quarter.

Other Expenses.  Core operating general and administrative expenses increased by $0.7 million in the 2003 fiscal quarter compared to the 20012002 fiscal quarter. The decrease was primarily due to increased leveraging of centralized costs and cost control efforts. Core operating segment general and administrative expenses decreased to 4%5% of core operating segmenttotal revenues in the 20022003 fiscal quarter, compared to 5%6% of revenues in the 20012002 fiscal quarter, due to strong revenue expansion combined with cost controls.

 

Sylvan Ventures management costs decreased by $0.3 million to $1.0 million for the 2003 fiscal quarter compared to $1.3 million for the 2002 fiscal quarter compared to $1.6 million for the 2001 fiscal quarter.  TheThis decrease was due tois a reduction in labor, travel, and consulting costs associated with the research, evaluation and acquisition of new investment opportunities as management shifted its focus towards managing and reinvesting solely in its current investment portfolio.

English Language Instruction—Spain—Loss on assets sold of $3.0 million represents the write-off of costs and assets identified upon finalizationresult of the sale transactionwind down of Sylvan Ventures in the third quarter of 2002. The asset write-offs include franchise receivables, fixed assets and working capital amounts that the Company incurred in connection with the sale of the business.2003.

 

Sylvan Ventures equity in net losses of affiliates decreasedincreased by $5.7 million to $1.0$7.5 million for the 2003 fiscal quarter compared to $1.8 million for the 2002 fiscal quarter compared to $10.8 million for the 2001 fiscal quarter. These losses relate to Sylvan Ventures' share of operating losses generated by the early stage enterprises in the investment portfolio not under Sylvan Ventures' control. This decreaseincrease was primarily dueattributable to the write-down of Sylvan Ventures’ equity investment in Chancery Software Limited in 2003 pursuant to the anticipated sale to a third party.  Sylvan Ventures changealso recorded a 2003 fiscal quarter loss of $8.4 million primarily attributable to the write-down of the cost of its investment in strategy to focusClubMom, Inc. under the caption “loss on managing its current investments compared to heavy investing in the acquisition of new early stage enterprises, as well as the consolidation of Walden and EdVerify. The reduction in the number of early stage enterprises and the decision to cease operations of certain portfolio companies slowed the losses absorbed by Sylvan Ventures as these companies initially generate significant losses. Additionally, a number of the enterprises in which Sylvan Ventures invested throughout 2000 and 2001 are further along in their business life cycle, and thus are generating smaller losses than in their earlier stages in the 2001 fiscal quarter. The adoption of FAS 142 also resulted in Sylvan Ventures' no longer amortizing goodwill associated with equity method investments. The amortization of goodwill relatedinvestments held for sale” pursuant to the Sylvan Ventures equity investments in the 2001 fiscal quarter was $2.1 million.anticipated third party sale.  Minority interests'interests’ share of Sylvan Ventures losses totaled $1.0$0.5 million and $0.0$0.4 million for the 20022003 and 20012002 fiscal quarters, respectively.  On March 10, 2003 Sylvan acquired the remaining common units of Sylvan Ventures.  Accordingly, minority interests’ shares for the fiscal quarter 2003 represent only their share of losses prior to the acquisition date.

 

Other non-operating items declineddecreased by $7.6$1.9 million for the 20022003 fiscal quarter compared to the 20012002 fiscal quarter primarily due to a decrease in interest income of $0.9 million resulting from lower investment balances and a reduced interest rate environment, foreign exchange losses of $0.4 million, increased minority interest expense of $0.4 million  and an increase in interest expense of  $0.4 million related to debt assumed in the $7.4 million impairment of the Company's investment in Frontline Group.August, 2002 Glion acquisition .

 

The Company'sCompany’s effective tax rate from continuing operations was 24%37.9% for the 20022003 fiscal quarter.  This reported effective income tax rate differs from the U.S. federal statutory tax rate due to the impact of state income taxes, minority interests, foreign income taxed at lower rates and the inability to utilize tax benefits from certain investment losses of Sylvan Ventures. Due to the volatility of Sylvan Ventures'Ventures’ income and losses, the Company'sCompany’s consolidated effective tax rate may fluctuate from quarter to quarter.  OnHowever, on a full year basis, the Company estimates that the 2002its effective income tax rate for the Company, prior to the cumulative effect of the change in accounting principle and excluding Sylvan Ventures, and for Sylvan Ventures’ operations, for the year ending December 31, 2003 will be 30%. The Company estimates that the 2002 effective income tax rate for Sylvan Ventures will be 24%. The forecasted income tax rate for the Company, excluding Sylvan Ventures, has decreased from the income tax rate forecasted in the first quarter of 2002 due to the tax benefits associated with the loss recorded in connection with the sale of WSI Spain. The forecasted income tax rate for Sylvan Ventures has decreased from the income tax rate forecasted in the first quarter of 2002 due to the decrease in

27



forecasted losses28.0% and the associated tax benefits. The impact of these changes in the estimated effective income tax rates was not material.

Comparison of results for the nine months ended September 30, 2002 to results for the nine months ended September 30, 2001.

        Revenues.    Total revenues increased by $81.7 million, or 23%, to $429.3 million for the nine months ended September 30, 2002 (the "2002 fiscal nine month period") from $347.6 million for the nine months ended September 30, 2002 (the "2001 fiscal nine month period"). This revenue increase was primarily driven by increases in tuition and enrollment at universities in the International Universities segment, as well as acquisitions of learning centers and same center revenue growth in the K-12 Education Services segment.

K-12 Education Services revenue increased by $22.4 million, or 16%, to $161.8 million for the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. Franchise royalties increased by $3.4 million, or 19%, as a result of a net increase of 23 new learning centers opened after September 30, 2001 and a 19% increase in same center revenue. Same center revenue growth was driven by the success of national advertising programs, favorable third-party financing alternatives and increased length of stay. Revenues from Company-owned learning centers increased $20.5 million, or 42%, to $69.3 million during the 2002 fiscal nine month period. Same center revenues increased 16%, or $7.1 million, with the remaining revenue increase of $13.4 million generated from 35 Company-owned centers acquired from franchise owners and 2 new centers opened during the past year. International revenues, primarily Schülerhilfe, increased by $1.3 million, or 12%, in the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. The remaining revenue increase of $0.3 million for the 2002 fiscal nine month period compared to the 2001 fiscal nine month period related to other franchise services and Ivy West. Contract-based revenues decreased by $3.1 million, or 6%, to $47.9 million in the 2002 fiscal nine month period compared to the 2001 fiscal nine month period due to a lower number of public school contracts. Operating revenue for K-12 Education Services represents 38% of total revenues of the Company for the 2002 fiscal nine month period.

Online Higher Education revenue increased by $6.6 million, or 21%, to $37.8 million for the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. Canter teacher-training revenue increased by $7.6 million, or 26%, to $37.1 million during the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. Canter's revenue increase was due to greater demand for its products, particularly the distance learning masters programs, which saw enrollments for the Summer 2002 semester increase by 22% to 12,100 students. Sylvan Teacher Institute revenue decreased by $1.0 million, or 57%, to $0.7 million in the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. The decrease was due to the planned decrease in professional development workshops performed in the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. Operating revenue for Online Higher Education represents 9% of total revenues of the Company for the 2002 fiscal nine month period.

International Universities revenue for the 2002 fiscal nine month period increased by $44.2 million, or 27%, to $206.3 million compared to the 2001 fiscal nine month period. This increase was primarily due to an increase in enrollments at UDLA, UVM, Les Roches and UEM. Additionally, revenue increased by $10.4 million due to the acquisitions of controlling interests in ESCE, Marbella and Glion, which occurred after the 2001 fiscal nine month period and, therefore, did not contribute to revenue for the 2001 fiscal nine month period. Non-Spain WSI revenues increased $5.5 million, primarily due to the acquisition of centers in Portugal in the third quarter of 2001. Operating revenue for International Universities represents 48% of total revenues of the Company for the 2002 fiscal nine month period.

English Language Instruction-Spain revenue decreased by $7.7 million, or 53%, to $7.0 million for the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. This revenue

28



decrease was the result of lower tuition revenues in existing Company-owned centers, as well as decreased royalties and didactic material sales to franchises due to oversaturation by English language instruction providers in Spain. Additionally, as of July 1, 2002, the Company no longer generates revenues from this segment as the Company sold its English Language Instruction business in Spain. Operating revenue for English Language Instruction-Spain represents 1% of total revenues of the Company for the 2002 fiscal nine month period.

Sylvan Ventures revenue increased to $16.4 million for the 2002 fiscal nine month period from $0.2 million for the 2001 fiscal nine month period. Revenues in the 2002 fiscal nine month period were generated from Walden ($14.1 million) for the months of February through September 2002, as well as eSylvan ($2.1 million) and Connections Academy ($0.2 million) throughout the 2002 fiscal nine month period. Prior to February 2002, Walden was accounted for under the equity method. Operating revenues for Sylvan Ventures represents 4% of total revenues of the Company for the 2002 fiscal nine month period.

        Direct Costs.    Total direct costs of revenues increased $77.5 million, or 25%, to $387.2 million for the 2002 fiscal nine month period from $309.7 million for the 2001 fiscal nine month period. Excluding the impact of goodwill amortization in the 2001 fiscal nine month period of $8.6 million, direct costs increased $86.1 million, or 29%, for the 2002 fiscal nine month period. Direct costs as a percentage of total revenues increased to 91% in the 2002 fiscal nine month period from 89% in the 2001 fiscal nine month period. Excluding the impact of goodwill amortization, direct costs as a percentage of revenues were 87% in the 2001 fiscal nine month period.

K-12 Education Services expenses increased $16.1 million to $127.4 million, or 79% of K-12 Education Services revenue for the 2002 fiscal nine month period, compared to $111.3 million, or 80% of K-12 Education Services revenue for the 2001 fiscal nine month period. Approximately $15.1 million of the 2002 fiscal nine month period increase related to expenses incurred in Company-owned learning centers due to the acquisition of 35 franchised learning centers, the opening of 2 new centers and costs associated with higher revenues at existing Company-owned centers. International expenses, primarily related to Schülerhilfe, increased $0.7 million. Franchise support costs increased $3.2 million in the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. These expense increases were partially offset by a decrease in contract-based expenses of $2.9 million in the 2002 fiscal nine month period compared to the 2001 fiscal nine month period, primarily due to improved cost controls on existing business and declines in the contract-based revenues.

Online Higher Education expenses increased by $3.4 million to $28.3 million, or 75% of Online Higher Education revenue for the 2002 fiscal nine month period, compared to $24.9 million, or 80% of Online Higher Education revenue for the 2001 fiscal nine month period. The decrease in expenses as a percentage of revenue for the 2002 fiscal nine month period was primarily due to the adoption of Statement No. 142 in 2002, which discontinued the amortization of goodwill. The amortization of goodwill related to the Canter acquisition was $2.3 million in the 2001 fiscal nine month period or 7% of Online Higher Education revenue for the 2001 fiscal nine month period. This decrease in expenses as a percentage of revenue was partially offset by an increase in expenses as a percentage of revenue due to the inclusion of operating results of OnlineLearning.net in the 2002 fiscal nine month period. The acquisition of OnlineLearning.net, effective July 1, 2001, resulted in lower margin revenue in the fiscal 2002 nine month period.

International Universities expenses increased by $38.5 million to $188.4 million, or 91% of International Universities revenue for the 2002 fiscal nine month period, compared to $149.9 million, or 93% of International Universities revenue for the 2001 fiscal nine month period. The increase in expenses reflects i) a higher volume of operating activities at the universities compared to the 2001 fiscal nine month period, ii) the acquisitions of ESCE, Marbella and Glion, which occurred after the third quarter of 2001, iii) an increase in overhead costs, including staffing expenses, as a result of the

29



increase in the volume of business and iv) an increase in expenses at WSI primarily associated with the acquisition of centers in Portugal. The decrease in expenses as a percentage of revenue was primarily due to operating efficiencies achieved throughout the International Universities segment, particularly at UEM and UVM, as well as in administrative overhead costs relative to the higher revenue levels. The timing of summer semester breaks results in significant seasonal fluctuations in operating results, depending primarily on the geographical location of the individual university. Revenues and direct instructional expenses are recorded during the period that classes are in session; however, certain basic operating and marketing expenses continue during the semester break, which distorts comparisons of expenses as a percentage of revenues.

English Language Instruction-Spain expenses decreased by $2.0 million to $11.2 million for the 2002 fiscal nine month period compared to $13.2 million for the 2001 fiscal nine month period due to the sale of the assets of WSI-Spain, effective July 1, 2002, to the former management team and the original founder of WSI.

Sylvan Ventures expenses increased to $33.8 million in the 2002 fiscal nine month period from $10.4 million in the 2001 fiscal nine month period as a result of the consolidation of Walden and EdVerify direct costs. Operating expenses are comprised of the expenses of revenue generating consolidated investments in eSylvan ($11.8 million), Walden ($16.4 million), Connections Academy ($3.6 million) and EdVerify ($1.4 million). Prior to February 2002 and June 2002, respectively, Walden and EdVerify were accounted for under the equity method. Since Connections Academy began to generate revenues in September 2002, its expenses are now reported as operating expenses of Sylvan Ventures, but were previously reported as general and administrative expenses. eSylvan's direct costs increased by $1.5 million in comparison to the 2001 fiscal nine month period due to expansion of services and operations.

        Other Expenses.    Core operating segment general and administrative expenses decreased by $1.5 million in the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. The decrease was primarily due to increased leveraging of centralized costs and effective cost control efforts. Core operating segment general and administrative expenses decreased to 4% of core operating segment revenues in the 2002 fiscal nine month period, compared to 5% of revenues in the 2001 fiscal nine month period, due to strong revenue expansion combined with cost controls.

Sylvan Ventures management costs decreased by $3.4 million to $3.6 million for the 2002 fiscal nine month period compared to $7.0 million for the 2001 fiscal nine month period. The decrease was due to significant reduction in labor, travel and consulting costs associated with the research, evaluation and acquisition of new investment opportunities as management shifted its focus towards managing and reinvesting solely in its current investment portfolio.

English Language Instruction—Spain—Loss on assets sold of $20.2 million represents the write-off of assets related to WSI Spain due to the Company's decision to dispose of the business unit, and the lack of material consideration received upon sale. The asset write-offs included franchise receivables, fixed assets and working capital amounts that the Company transferred to the buyer effective July 1, 2002.

Sylvan Ventures equity in net losses of affiliates decreased to $4.6 million for the 2002 fiscal nine month period from $46.2 million for the 2001 fiscal nine month period. These losses relate to Sylvan Ventures' share of operating losses generated by the early stage enterprises in the investment portfolio not under Sylvan Ventures' control. This decrease was primarily due to Sylvan Ventures change in strategy to focus on managing its current investments compared to heavy investing in the acquisition of new early stage enterprises, as well as the consolidation of Walden and EdVerify. The reduction in the number of early stage enterprises and the decision to cease operations of certain portfolio companies slowed the losses absorbed by Sylvan Ventures, as these companies initially generate significant losses. Additionally, a number of the enterprises in which Sylvan Ventures invested throughout 2000 and 2001

30



are further along in their business life cycle, and thus are generating reduced losses relative to their earlier stages in the 2001 fiscal nine month period. The adoption of FAS 142 also resulted in Sylvan Ventures' no longer amortizing goodwill associated with equity method investments. The amortization of goodwill related to the Sylvan Ventures equity investments in the 2001 fiscal nine month period was $7.1 million. Minority interests' share of Sylvan Ventures losses totaled $2.2 million and $3.1 million for the 2002 and 2001 fiscal nine month periods,40.0 %, respectively.

 Other non-operating items improved by $4.7 million for the 2002 fiscal nine month period compared to the 2001 fiscal nine month period. This decrease was attributable in part to the $14.2 million loss on the Caliber investment which was incurred in the 2001 fiscal nine month period, partially offset by the $7.4 million impairment of the Company's investment in Frontline Group in the 2002 fiscal nine month period, as well as a decrease in interest income of $3.2 million resulting from lower investment balances and a reduced interest rate environment.

        The Company's effective tax rate was 20% for the 2002 fiscal nine month period, excluding the cumulative effect of change in accounting principle. This reported effective income tax rate differs from the U.S. federal statutory tax rate due to the impact of state income taxes, minority interests, foreign income taxed at lower rates and the inability to utilize tax benefits from certain investment losses of Sylvan Ventures. Due to the volatility of Sylvan Ventures' income and losses, the Company's consolidated effective tax rate may fluctuate from quarter to quarter. On a full year basis the Company estimates that the 2002 effective income tax rate for the Company, prior to the cumulative effect of the change in accounting principle and excluding Sylvan Ventures, will be 30%. The Company estimates that the 2002 effective income tax rate for Sylvan Ventures will be 24%. The forecasted income tax rate for the Company, excluding Sylvan Ventures, has decreased from the income tax rate forecasted in the first quarter of 2002 due to the tax benefits associated with the loss recorded in connection with the sale of WSI Spain.21



 The forecasted income tax rate for Sylvan Ventures has decreased from the income tax rate forecasted in the first quarter of 2002 due to the decrease in forecasted losses and the associated tax benefits. The impact of these changes in the estimated effective income tax rates was not material.

        Cumulative Effect of Change in Accounting Principle.    As a result of adopting Statement No. 142 as of January 1, 2002 and performing the required transitional impairment tests, the Company recorded a non-cash charge of $78.6 million, net of income tax benefit of $7.7 million, which is included in cumulative effect of change in accounting principle in the consolidated statements of operations. The impairment charge relates solely to the English Language Instruction business and consists of the write-down of goodwill related to the distressed operations in Spain and amounts originally paid for franchise rights and corporate center operations in other countries.

31



Liquidity and Capital Resources

Condensed Statement of Cash Flows
Nine

Three Months Ended September 30, 2002March 31, 2003

(Amounts in Thousands)

 
 Core Operating
Segments

 Sylvan
Ventures

 Consolidated
 
Operating activities          
Net loss $(67,624)$(22,200)$(89,824)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
 Cumulative pre-tax effect of change in accounting principle  86,334    86,334 
 Depreciation and amortization  20,015  1,792  21,807 
 Loss on assets sold  20,244    20,244 
 Other non-cash items  15,086  502  15,588 
 Changes in working capital  105  (837) (732)
  
 
 
 
Net cash provided by (used in) operating activities  74,160  (20,743) 53,417 
  
 
 
 
Investing activities          
Purchases of property and equipment  (45,886) (949) (46,835)
Change in investments in affiliates and other investments  7,828  (2,817) 5,011 
Cash paid for acquired businesses, net of cash received  (38,921) 1,255  (37,666)
Other investing activities, net  6,261  9,471  15,732 
  
 
 
 
Net cash provided by (used in) investing activities  (70,718) 6,960  (63,758)
  
 
 
 
Financing activities          
Net cash distributed to minority members of Sylvan Ventures    (448) (448)
Intercompany funding  (34,338) 34,338   
Other financing activities, net  16,229  (56) 16,173 
  
 
 
 
Net cash provided by (used in) financing activities  (18,109) 33,834  15,725 
  
 
 
 
Effect of exchange rate changes on cash  (2,593)   (2,593)
  
 
 
 
Net increase (decrease) in cash and cash equivalents  (17,260) 20,051  2,791 

Cash and cash equivalents at beginning of period

 

 

101,877

 

 

317

 

 

102,194

 
  
 
 
 
Cash and cash equivalents at end of period $84,617 $20,368 $104,985 
  
 
 
 

 

 

 

Core Operating
Segments

 

Sylvan
Ventures

 

Consolidated

 

Operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

5,203

 

$

(21,174

)

$

(15,971

)

Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

8,820

 

273

 

9,093

 

Loss on disposal of discontinued operations

 

5,217

 

 

5,217

 

Loss on investments held for sale

 

 

8,394

 

8,394

 

Other non-cash items

 

3,925

 

3,937

 

7,862

 

Changes in working capital

 

(5,567

)

2,159

 

(3,408

)

Net cash provided by (used in) operating activities

 

17,598

 

(6,411

)

11,187

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchase of property and equipment

 

(9,341

)

(73

)

(9,414

)

Change in investments in affiliates and other investments

 

(137

)

(194

)

(331

)

Cash paid for contingent consideration for prior period acquisitions

 

(1,714

)

 

(1,714

)

Other investing activities, net

 

(5,764

)

 

(5,764

)

Net cash used in investing activities

 

(16,956

)

(267

)

(17,223

)

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Net cash received from minority members of Sylvan Ventures

 

 

829

 

829

 

Inter-company funding

 

(3,643

)

3,643

 

 

Other financing activities, net

 

(2,030

)

 

(2,030

)

Net cash provided by (used in) financing activities

 

(5,673

)

4,472

 

(1,201

)

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

234

 

 

234

 

Net decrease in cash and cash equivalents

 

(4,797

)

(2,206

)

(7,003

)

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

103,119

 

2,924

 

106,043

 

Cash and cash equivalents at end of period

 

$

98,322

 

$

718

 

$

99,040

 

22



Cash provided by operations was $53.4$11.2 million for the 20022003 fiscal nine month period,quarter, net of $20.7$6.4 million cash used in operations related toby Sylvan Ventures.  This compares to cash provided by operations of $13.4 million for the 2002 fiscal quarter, net of $8.4 million cash used in operations of $76.6 million for the 2001 fiscal nine month period, of which $27.1 million related toby Sylvan Ventures. The reported net loss of $89.8$16.0 million was offset by significant non-cash items, such as the pre-tax cumulative effectloss on Sylvan Ventures investments held for sale ($8.4 million), loss on disposal of change in accounting principle of $86.3 million,discontinued operations ($5.2 million), depreciation and amortization charges of $21.8 million, loss on assets sold of $20.2 million,($9.1 million), equity in net loss of affiliates, primarily of Sylvan Ventures of $4.6 million, loss on investment of $7.5 million($7.4 million) and minority interest of $2.0 million ($(2.2) million—Sylvan Ventures; $4.2 million—Core Operating Segments)1.3 million).  Cash used in working capital activity totaled $0.7$3.4 million in the 20022003 fiscal nine month period,quarter, of which $0.8$2.2 million relatedwas contributed by to Sylvan Ventures.  In the 20012002 fiscal nine month period,quarter, working capital related decreases in liquidity of $129.7$2.9 million consisted primarily of income tax payments resulting from the first quarter 2000 sale of Prometric and $11.4 milliondecreases related to Sylvan Ventures.Ventures of $1.6 million.

32



Cash used inby investing activities was $63.8$17.2 million for the 2003 fiscal quarter compared to cash used by investing activities of $17.7 million for the 2002 fiscal nine month period, net of $7.0 million cash provided by investing activities related to Sylvan Ventures. This compares to cash provided by investing activities of $8.9 million for the 2001 fiscal nine month period, net of $36.8 million cash used in investing activities related to Sylvan Ventures.quarter.  The 20022003 investment activity was primarily the result of purchases of property and equipment of $46.8$9.4 million, contingent payments for acquisitions of $1.7 million and expenditures for deferred costs and other assets of $4.5 million.  The 2002 fiscal quarter investment activity primarily consisted of purchases of property and equipment of $13.5 million, net cash paid for acquired businesses of $37.7$10.2 million and increases in other assets and expenditures for deferred costs of $5.2 million partially offset by net proceeds from the sale of available-for-sale securities of $21.1 million. The 2001 fiscal nine month period investment activity primarily consisted$12.0 million, of net proceeds from the sale of available-for-sale securities of $143.1 million, partially offset by increases in investments in and advances to affiliates of $38.2 million, purchases of property and equipment of $40.4 million and payments related to acquisitions of $50.8 million. At September 30, 2002, the Company has accrued obligations payable in cash of $24.2which $8.6 million related to contingent consideration for certain prior acquisitions. $16.1 million was paid in October 2002, $4.3 million is expected to be paid in the next twelve months and $3.8 million is expected to be paid in 2004.Sylvan Ventures.

 

Cash provided by financing activities was $15.7 million in the 2002 fiscal nine month period, net of $0.5 million cash used in financing activities related to Sylvan Ventures, excluding intercompany funding. This compareswas $1.2 million in the 2003 fiscal quarter compared to cash provided by financing activities of $43.1$16.6 million in the 20012002 fiscal nine month period,quarter.  The 2003 financing activity related primarily to payments of which $16.5long-term debt of $2.6 million, related topartially offset by proceeds from the issuance of debt of $0.6 million and cash received from the minority interest partners of Sylvan Ventures excluding intercompany funding. Theof $0.8 million.  Cash provided by financing activities of $16.6 million in the 2002 financing activityfiscal quarter related primarily to cash received from the exercise of options of $14.7$8.6 million and net proceeds from the issuance of debt of $19.5$11.7 million, partially offset by payments of long-term debt of $16.6 million, costs incurred and capitalized in connection with the potential International Universities public offering of $2.5 million and net payments to the minority interest partners in Sylvan Ventures of $0.5 million. Cash provided by financing activities in the 2001 fiscal nine month period related primarily to cash received from the minority interest partners in Sylvan Ventures of $23.3 million and proceeds from the exercise of options of $15.0$4.4 million.

 The Company's Board of Directors has approved a stock repurchase program under which the Company, from time to time and at management's discretion, may purchase up to an aggregate of 3.5 million shares of the Company's common stock on the open market. The Company recently announced that it has hired financial advisors to assist management and the Company's Board of Directors in evaluating alternatives with respect to the structure of its Sylvan Ventures segment. Until this review is completed, the Company does not anticipate the purchase of any of its shares.

The Company anticipates that cash flow from operations, available cash and existing credit facilities will be sufficient to meet its operating requirements, including expansion of its existing business, funding International Universitycampus based acquisitions, and payment of contingent consideration and fundingconsideration.  As discussed more fully in "Overview—Pending Sale of Sylvan Ventures investments and operating costs. Sylvan Ventures has outstanding commitmentsBusiness Units", the Company expects to provide additional fundingreceive in excess of approximately $16.9$112 million to certain portfolio companies.in cash upon the sale of its K-12 business units in 2003.  The Company continues to examine opportunities in the educational services industry for potential synergistic acquisitions. Costs incurred in connection with potential acquisitions

Contractual Obligations and greenfield projects, currently $2.1 million at September 30, 2002, are capitalized. These costs become part of the purchase price when the acquisition is completed or are expensed when the potential acquisition is determined to be not viable. Costs incurred and capitalized in connection with the potential International Universities public offering would be expensed if the results of the evaluation of Company structure alternatives should result in the cancellation of the potential public offering.

33



Contingent Matters

 

The following tables reflect the Company'sCompany’s contractual obligations and other commercial commitments as of September 30, 2002March 31, 2003 (amounts in thousands):

 
 Payments Due by Period
Contractual Obligations

 Total
 Through 2003
 2004-2005
 2006-2007
 2008 and after
Long-Term Debt $161,704 $18,020 $17,989 $2,839 $122,856
Operating Leases  168,776  38,319  56,009  42,524  31,924
Other Long-Term Obligations  24,192  20,354  3,838    
  
 
 
 
 
Total Contractual Cash Obligations $354,672 $76,693 $77,836 $45,363 $154,780
  
 
 
 
 
 
  
 
Amount of Commitment
Expiration Per Period

Other Commercial
Commitments

 Total
Amounts
Committed

 Through 2003
 2004-2005
 2006-2007
 2008 and after
Lines of Credit $100,000 $100,000 $ $ $
Guarantees  1,488  743  745    
Standby Letters of Credit  1,258    1,258    
  
 
 
 
 
Total Commercial Commitments $102,746 $100,743 $2,003 $ $
  
 
 
 
 

 

 

 

Payments Due by Period

 

Contractual Obligations

 

Total

 

Through 2004

 

2005-2006

 

2007-2008

 

2009 and after

 

Long-term debt

 

$

164,307

 

$

19,029

 

$

8,848

 

$

5,782

 

$

130,648

 

Long-term debt of discontinued operations

 

(293

)

(70

)

(80

)

(80

)

(63

)

Operating leases

 

235,698

 

57,460

 

55,025

 

51,256

 

71,957

 

Operating leases of discontinued operations

 

(37,566

)

(20,666

)

(12,713

)

(3,733

)

(454

)

Due to shareholders and other long-term obligations

 

18,694

 

10,947

 

 

7,747

 

 

Total contractual cash obligations of continuing operations

 

$

380,840

 

$

66,700

 

$

51,080

 

$

60,972

 

$

202,088

 

23



 

 

Amount of Commitment
Expiration Per Period

 

Other Commercial
Commitments

 

Total
Amounts
Committed

 

Through
2004

 

2005-2006

 

2007-2008

 

2009 and after

 

Lines of credit

 

$

103,556

 

$

103,556

 

 

 

 

Guarantees

 

4,831

 

4,011

 

820

 

 

 

Guarantees of discontinued operations

 

(1,128

)

(783

)

(345

)

 

 

Standby letters of credit

 

1,674

 

416

 

1,258

 

 

 

Total commercial commitments of continuing operations

 

$

108,933

 

$

107,200

 

$

1,733

 

 

 

In connection with certain acquisitions, variable amounts of contingent consideration are payable to the seller based upon specified terms.  All existing contingent consideration agreements are predicated upon improved operating profitability of the acquired entities and utilize multiples consistent with those used to calculate the initial purchase price.  The Company will record the contingent consideration when the contingencies are resolved and the additional consideration becomes payable.

 Variable amounts of contingent consideration are payable to the seller of Les Roches if specified levels of earnings are achieved in 2002.

Variable amounts of contingent consideration are payable to the seller of UDLA in 2006 and 2007 if specified levels of earnings are achieved in 2004, 2005 and 2006. AdditionalThe Company is currently in negotiations with the sellers of Les Roches to determine the amount of contingent consideration that will be due based on the adjusted 2002 operating results, as set out in the share purchase agreement.  Under the share purchase agreement, the maximum amount of additional consideration to be earned is $3.5 million.  In connection with the acquisition of $0.5 millionNTU, there is duecontingent consideration payable to the sellers for a minimum of UVM$2.0 million and a maximum of $3.0 million if NTU is sold or is involved in 2003 if 2002 earnings exceed certain specified amounts.an initial public offering where the value of NTU exceeds $200.0 million.

 

The Company has entered into agreements with certain WSI franchisees of Sylvan Learning Centers and Wall Street Institute that allow the franchisees to require the Company to repurchase the centers in the future at a predetermined multiple of operating results upon the achievement of specified operating thresholds.  The Company does not believe that these commitments, if ultimately triggered by future events, would materially effectaffect its liquidity.

International Exposure

The Company maintains diverse operations in a broad rangehas guaranteed the bank loans of international locations. The international aspectscertain K-12 business franchisees.  These loans primarily represent the financing of programs and other purchased instructional materials.  Of the $1.8 million of available credit under these loans, the outstanding balance was $0.6 million at March 31, 2003.  This guarantee will be assumed by Educate, Inc. when the sale of the Company's operations create additional exposure to political uncertainties, currency devaluationsK-12 business division is final.

The Company has guaranteed a $2.0 million bank line of credit of an affiliate.  There were no borrowings outstanding as of March 31, 2003 and national regulations affecting the provisionline of educational services. Revenues and profits in any period maycredit expires on February 29, 2004. This guarantee will be significantly impactedassumed by international developments outsideEducate, Inc. when the controlsale of the Company.

Consumer Credit Availability ExposureK-12 business division is final.

 

The Company benefits fromhas guaranteed equipment leases of certain affiliates.  As of March 31, 2003, the availabilityamount payable by the affiliates under these leases was $0.6 million.  $0.5 million of these equipment guarantees will be assumed by Educate, Inc. when the sale of the K-12 business division is final.

The Company has entered into an agreement with a third party financing for educational services in the domestic marketplace and in eachto provide course materials.  Payment is due upon sale of the international countries wherecourse materials to franchisees.  Under the terms of the agreement, the Company operates. The Companyhas guaranteed certain annual minimum payments of  $0.3 million, to be paid quarterly.  At March 31, 2003, the amount remaining to be paid under the agreement is at risk for the loss of revenues due to contraction of the consumer credit markets for$0.9 million.

34



educational services in any business segment or location where operations exist. Current market conditions reflect a reduction of available consumer financing for training programs in Spain; however, the university post secondary market has not been impacted by these financing constraints.

24



Seasonality in Results of Operations

 

The Company experiences seasonality in its results of operations primarily as a result of changes in the level of student enrollments and the timing of semester cycles, particularly in the International Universities segment.Campus Based and Online segments.  Timing of semester breaks at the International UniversitiesCampus Based universities results in the strongest operating performance being achieved in the second and fourth quarters of the year. At the Online universities, the strongest operating results are achieved in the fourth quarter of the year because frequent intakes during the year results in steady growth in enrollment during the year, with the highest enrollment levels at the end of the year.  Other factors that impact the seasonality of operating results include: timing of contracts funded under Title I, timing of summer vacations, timing of franchise license fees and the timing of Sylvan Ventures'Ventures’ development costs.  Revenues and profits in any period willare not necessarily be indicative of results in subsequent periods.

35

Severe Acute Respiratory Syndrome

At the time of publication of this document, Severe Acute Respiratory Syndrome (SARS) has emerged as a significant public health risk, particularly in China and other Asian countries.  The Company currently has English Language Instruction franchises and related investments located in Asia which could potentially be affected by the threat of SARS.  Revenue from these operations represents less than 1% of the Company’s overall revenues.  As of March 31, 2003, the amount due from franchisees in Asia totaled approximately $2,800 which consisted of receivables related to royalties and didactic materials. The Company also has a $7,500 note receivable related to a loan given to the WSI master franchisor of China.  In addition, a significant portion of the student base in the Hospitality universities are students from Asia.

While during the quarter ended March 31, 2003, these operations experienced no material impact as a result of SARS, the Company anticipates some negative future impact, and will continue to actively monitor and respond to the situation.

25




ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

 

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of financial instruments.  The Company is exposed to financial market risks, including changes in foreign currency exchange rates, interest rates, equity prices and investment values.  The Company occasionally uses derivative financial instruments to protect against adverse currency movements related to significant foreign acquisitions. The Company did not use any derivative financial instruments during the 2003 fiscal quarter.  Exposure to market risks related to operating activities is managed through the Company'sCompany’s regular operating and financing activities.

Foreign Currency Risk

        TheIn the 2003 fiscal quarter, the Company derivesderived approximately 53% 84%of its revenues from continuing operations from  customers outside the United States.  This business iswas transacted through a network of international subsidiaries, generally in the local currency that is considered the functional currency of that foreign subsidiary.  Expenses are also incurred in the foreign currencies to match revenues earned and minimize the Company'sCompany’s exchange rate exposure to operating margins.  A hypothetical 10% adverse change in average annual foreign currency exchange rates would have decreased operating income and cash flows for the 20022003 fiscal nine month periodquarter by $2.5$1.2 million. The Company generally views its investment in most of its foreign subsidiaries as long-term. The effects of a change in foreign currency exchange rates on the Company'sCompany’s net investment in foreign subsidiaries are reflected in other comprehensive income (loss).  A 10% depreciation in functional currencies relative to the U.S. dollar would have resulted in a decrease in the Company'sCompany’s net investment in foreign subsidiaries of approximately $22.3$25.7 million at September 30, 2002.March 31, 2003.

Interest Rate Risk

The Company holds its cash and cash equivalents in high quality, short-term, fixed income securities.  Consequently, the fair value of the Company'sCompany’s cash and cash equivalents would not be significantly impacted by either aan 100 basis point increase or decrease in interest rates due to the short-term nature of the Company'sCompany’s portfolio.  The Company'sCompany’s long-term revolving credit facility bears interest at variable rates, and the fair value of this instrument is not significantly affected by changes in market interest rates.  The Company'sCompany’s convertible debentures bear interest at 5%, which currently approximates the market rate.  A 100 basis point decrease in interest rates would have increasedreduced net interest expenseincome for the 20022003 fiscal nine month periodquarter by $0.9$0.2 million.

Equity Price Risk

 

The fair value of the Company'sCompany’s convertible debentures is sensitive to fluctuations in the price of the Company'sCompany’s common stock into which the debentures are convertible.  Changes in equity prices would result in changes in the fair value of the Company'sCompany’s convertible debentures due to the difference between the current market price of the debentures and the market price at the date of issuance of the debentures.  A 10% increase in the 20022003 fiscal nine month periodquarter end market price of the Company'sCompany’s common stock into which the debentures are convertible would result in an increase of approximately $8.3$9.6 million in the net fair value of the debentures.

 

The Company is exposed to equity price risks on equity securities included in the portfolio of investments entered into for the promotion of business and strategic objectives. The Company typically does not attempt to reduce or eliminate its market exposure on these securities.  A 10% adverse change in equity prices would not materially impact the fair value of the Company'sCompany’s marketable securities or other comprehensive income (loss).

Investment Risk

 

The Company'sCompany’s investment portfolio contains debt securities that mature within one year.  A hypothetical 10% adverse change in the fair value of the debt securities would not materially adversely

36



impact effect earnings or cash flows because of the Company'sCompany’s ability to hold the debt securities until maturity.

 

In addition to the debt securities, the Company has, an investment portfolio that consists of direct investment positions in education technology companies through Sylvan Ventures, as well as short-term investments in available-for-sale debt and equity securities.  The Company'sCompany’s investment portfolio is exposed to risks arising from changes in these investment values.

 

The Company'sCompany’s investment portfolio includes a number of holdings of non-publicly traded companies in the educational services industry. The Company accounts for these investments using either the cost method (cost less impairment, if any) or the equity method of accounting.  Equity method investments are specifically excluded from the scope of this disclosure. 

26



Non-public investments where the Company owns less than a 20% interest are subject to fluctuations in market value, but their current illiquidity reduces the exposure to pure market risk while increasing the risk that the Company may not be able to liquidate these investments in a timely manner for their estimated value.

 

All the potential impacts noted above are based on sensitivity analysis performed on the Company's financial position of the Company’s continuing operations at September 30, 2002.March 31, 2003.  Actual results may differ materially.


ITEM 4.CONTROLS AND PROCEDURES

 

As of September 30, 2002,March 31, 2003, an evaluation was performed under the supervision and with the participation of the Company'sCompany’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures.  Based on that evaluation, the Company'sCompany’s management, including the CEO and CFO, concluded that the Company'sCompany’s disclosure controls and procedures were effective as of September 30, 2002.March 31, 2003.  There have been no significant changes in the Company'sCompany’s internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002.March 31, 2003.

37


27



PART II—II - OTHER INFORMATION

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

(a)                                  Exhibits

(a)
Exhibits

    Reference is made to the Exhibit Index of thisthe Report on Form 10-Q.

(b)

Reports on Form 8-K

    The Company filed one reporttwo current Reports on Form 8-K during the ninethree month period ended September 30, 2002.March 31, 2003. The Form 8-K dated September 5, 2002March 11, 2003 and the Form 8-K/A dated March 12, 2003 related to the acquisitionMarch 10, 2003 Asset Purchase Agreement that was signed by and among Educate Operating Company, LLC (“Purchaser”), Apollo Sylvan, LLC, Apollo Sylvan II, LLC, Educate Inc., Sylvan Learning Systems, Inc. and Sylvan Ventures, L.L.C. This agreement specified that Sylvan Learning Systems, Inc. would sell the assets composing Sylvan’s K-12 educational business and Sylvan Ventures, L.L.C would sell the right, title and interest in Connections Academy and eSylvan subject to the terms and conditions specified in the agreement sale of Glion Group S.A.

38



SIGNATURE
K-12.

 

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Sylvan Learning Systems, Inc.



Date:  November 12, 2002May  15 , 2003

/s/ SEAN R. CREAMER      


Sean R. Creamer

Sean R. Creamer, Senior Vice President and
Chief Financial Officer

39

28



CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATIONSCERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Douglas L. Becker, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Sylvan Learning Systems, Inc.;

2.               Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.               Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.               The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)             evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.               The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.               The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003

/s/ Douglas L. Becker

Douglas L. Becker

Director, Chairman of the Board and
Chief Executive Officer

29




CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Sean R. Creamer, certify that:

1.               I have reviewed this quarterly report on Form 10-Q of Sylvan Learning Systems, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant'sregistrant’s other certifying officersofficer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant'sregistrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"“Evaluation Date”); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant'sregistrant’s other certifying officersofficer and I have disclosed, based on our most recent evaluation, to the registrant'sregistrant’s auditors and the audit committee of the registrant'sregistrant’s board of directors (or persons performing the equivalent functions):

a)

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant'sregistrant’s ability to record, process, summarize and report financial data and have identified for the registrant'sregistrant’s auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sregistrant’s internal controls; and

6.

The registrant'sregistrant’s other certifying officersofficer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 12, 2002May 15, 2003

/s/ DOUGLAS L. BECKER      


Douglas L. Becker
Director, Chairman of the Board and
Chief Executive Officer

40


CERTIFICATIONS

I, Sean R. Creamer, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Sylvan Learning Systems, Inc.;

2.
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.
The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002/s/  SEAN R. CREAMER      
Sean R. Creamer

Sean R. Creamer

Senior Vice President and
Chief Financial Officer

41

30



Index
Index
Number


Description


99.1

Certification of Douglas L. Becker pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


99.2



99.2

Certification of  Sean R. Creamer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

31




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Index
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
PART II—OTHER INFORMATION
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